Question 33:

The Blossom Company is a multidivisional company. Its managers have full responsibility for profits and complete autonomy to accept or reject transfers from other divisions. Division A produces a sub-assembly part for which there is a competitive market. Division B currently uses this sub-assembly for a final product that is sold outside at $2,350. Division A charges division B market price for the part, which is $1,350 per unit. Variable costs are $1,020 and $1,150 for divisions A and B, respectively.

The manager of division B feels that division A should transfer the part at a lower price than market because, at market, division B is unable to make a profit.

1.Calculate division B's contribution margin if transfers are made at the market price, and calculate the company's total contribution margin. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Division B's contribution margin $ _________

Company's total contribution margin $ _________

2.Assume that division A can sell all its production in the open market. Should division A transfer the goods to division B?

Yes or no?

If so, at what price? (If no transfer should be made, please enter 0. Do not leave any fields blank.)

Transfer Price $ _______

3.Compare the contribution margins under three different alternatives. Assume that division A can sell in the open market only 450 of the 900 units it can produce every month, at $1,350 per unit. Assume also that a 20% reduction in price is necessary to sell all 900 units each month. Assume transfers are made and the price is maintained.

Alternatives Contribution Margin Maintain price and no transfers Cut price and no transfers Maintain price and transfers