The Scissor Brothers Corp. produces and sells scissors (of course). Scissors Bros. is organized into two divisions, the UP division and the DOWN division. The UP division manufactures 30,000 pairs of scissors per year, selling 10,000 units externally at a price of $8 each and transferring the remaining 20,000 units internally to the DOWN division. The DOWN division modifies these 20,000 units and sells them to external clients. The UP division incurs variable manufacturing costs of $4.50 for each of its 30,000 output units and total annual fixed manufacturing cost of $60,000. You can ignore SG&A costs for this exercise. Scissor Brothers have adopted a market-based transfer pricing policy. For each pair of scissors it receives from the UP division, the DOWN division pays the weighted average external price the UP division charges its customers outside Scissor Brothers. The current transfer price thus equals $8. Ana Patronic, the manager of the UP division receives an offer from Jean-Georges, an international hair salon supplier. Jean-Georges offers to buy 4,000 pairs of scissors at a price of $6.30 each, knowing that the entire scissors industry (including Scissor Brothers) has excess capacity at this time. There are no additional fixed manufacturing, SG&A, or transportation costs associated with this offer. UPs variable manufacturing costs are $4.50 also for each of the units Jean-Georges is requesting. Accepting Jean-Georges offer would not affect the current price of $8 charged to existing external customers. Question 1: a. What is the contribution margin associated with this special order from Jean-George. What is the appropriate interpretation of this number? (Note: Recall from your Cost Accounting Class that contribution margin is the revenue you generate minus all variable costs.

b. Compute the resulting change in the UP divisions profit if they accept Jean-Georges offer. Will Ana Patronic accept this offer if she aims to maximize the UP divisions profit? c. Would the top management of Scissor Brothers Corp. want the UP division to accept the offer? Compute the change in firm-wide profit associated with Jean-Georges offer.