Frocks and Gowns, Incorporated, Has Two Divisions, Day Wear and Night

question 126

Multiple Choice

Frocks and Gowns, Incorporated, has two divisions, Day Wear and Night Wear. The Day Wear Division has an investment base of $750,000 and produces and sells 100,000 units of Collars at a market price of $10.00 per unit. Variable costs for the Collars total $3.50 per unit and fixed charges are $4.00 per unit (based on a capacity of 120,000 units) . The Night Wear Division wants to purchase 25,000 units of Collars from the Day Wear Division. However, the Night Wear Division is only willing to pay $6.75 per unit.
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What is the contribution margin for the Day Wear Division if it transfers 25,000 units to the Night Wear Division at $6.75 per unit?

• A) $250,000.
• B) $650,000.
• C) $675,000.
• D) $698,750.

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Definitions:

Optimum Point

The most advantageous position or condition that can be achieved in a given circumstance or under certain parameters.

Frozen Yogurt

A dessert made from yogurt and sometimes other dairy products that is frozen and has a taste and texture similar to ice cream.

Indifference Map

A graphical representation of different bundles of goods between which a consumer is indifferent.

Marginal Rate of Substitution

The pace at which a consumer is capable of sacrificing some portion of one item to obtain a different item, without altering their overall happiness.