Consider Exhibit 22-5, which shows the responsibility margins for the Sales Depa

Question

Consider Exhibit 22-5, which shows the responsibility margins for the Sales Department and Repairs Department profit centers at the 42nd Street store of NuTech Electronics. Assume that 25 percent of the Repairs Department repair work is done for the Sales Department and that the Repairs Department has been transferring its services to Sales at variable cost as the transfer price. Because the Repairs Department has a negative responsibility profit, assume the Repairs Department has asked the manager of the 42nd Street store to allow a transfer price that will earn the normal contribution margin that is earned on repair services to external customers Compute the new responsibility margins for the Sales and Repairs Departments if the store manager allows the new transfer price. Responsibility 4,400 2,800 Margin Sales department Repairs departmentS

Explanation / Answer

Responsibility Margin :

Responsibility margin is the difference between contribution margin and traceable fixed cost.

Traceable fixed cost are those cost which can be eliminated if the related department were closed.

Here there are two departments

1. Sales department

2.Repair department

25 % of repair department work is done for sales department

Repair department margin : $2800

In this 25% is for sales department = $ 700 ($2800*25%)

75% is for Repair department = $ 2100 ( $2800 - $700)

Generally Transfer price charged by supplying division is the cost for receiving division.

since no information about margin percentage $700 is taken as variable cost.

Here $700 is variable cost ( Transfer price for repair dept) , so this is the cost for sales department.

so, Revised responsibility margin for sales department = $ 3700 ( $4400 - S700)

Revised responsibility margin of repair department = $ 2800 ( no change being supplying division)

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