Question

The Harris Company is decentralized, and divisions are considered investment centers. Harris has one division that manufactures oak dining room chairs with upholstered seat cushions. The Chair Division cuts, assembles, and finishes the oak chairs and then purchases and attaches the seat cushions. The Chair Division currently purchases the cushions for $22 from an outside vendor. The Cushion Division manufactures upholstered seat cushions that are sold to customers outside the company. The Chair Division currently sells 800 chairs per quarter, and the Cushion Division is operating at capacity, which is 800 cushions per quarter. The two divisions report the following information: Chair Division Cushion Division Sales Price per Chair $ 85 Sales Price per Cushion $ 32 Variable Cost per Cushion 13 Variable Cost (other than cushion) 42 Variable Cost (cushion) |_22 Contribution Margin per Chair $ 21 Contribution Margin per Cushion $ 19

Assume the Cushion Division has capacity of 1,600 cushions per quarter and can continue to supply its outside customers with 800 cushions per quarter and also supply the Chair Division with 800 cushions per quarter. What transfer price should Harris Company set? Explain your reasoning. Using the transfer price you determined, calculate the total contribution margin for the quarter.

Answer 1

The harries company have two devision. One is Chair devision and the second is Cushion Devision The Cushion devision has total capacity of 1600 units per quarter. Cushin devision sell total 800 units to outside customer. Therefore Balance 800 units can be transfer to chair devision which does not effcet profit of the cushion devision devision due to spare capacity. Minimum transfer price should be equal to Variable cost per unit i.r. $ 13 per unit Calculation of contribution of harries company Cushin Devision Chair Devision $ 68000 $ 25,600 $ 10400 SALES REVENUE Sell to ouitside customer (800 units x $85) Sell to outside customer (800 units x $ 32) Transfer to Chair devision from cushion devision (800 units x $ 13) Total sales revenue Variable cost (800 units x $42) & (1600 units x $13) Transfer cost ( 800 units x $13) Total contribution Total $68000 $25600 $10400 $104000 $ 54400 $10400 $39200 $20800 $33600 $ 10400