Managerial Accounting

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Calculating Gross Margin


Electrika Enterprises has two divisions, Y and Z. To encourage Division Z to obtain its components from Division Y, management has allowed Z to record its purchases from Y at Y's unit variable cost. To encourage Y to transfer the components to Z, Y is allowed to use the same price for transfers to Z as it uses in selling to outside customers.

Division Y can sell its output of 500,000 units at a price of \$60 per unit either internally or outside. Total costs of production for Y were \$25 million, of which \$5 million were fixed. Y sold 300,000 units to the outside market and 200,000 units to Z.

Division Z sold 200,000 units to the outside market at a price of \$125 per unit. In addition to the cost of components purchased from Y, Z incurred additional manufacturing costs of \$9 million.

Calculate the gross margin for Division Z.