Question

A (Click the icon to view additional information.) The Greco Company is decentralized, and divisions are considered investment centers Greco 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. Read the requirements Requirement 1. Determine the total contribution margin for Greco Company for the quarter Number of units X Contribution margin per unit Total contribution margin Chair Division Cushion Division Total Requirement 2. Assume the Chair Division purchases the 1,600 cushions needed from the Cushion Division at its current sales price. What is the total contribution margin for each division and the company? Number of units X Contribution margin per unit Total contribution margin Chair Division X Cushion Division X Total Requirement 3. Assume the Chair Division purchases the 1,600 cushions needed from the Cushion Division at its current variable cost. What is the total contribution margin for each division and the company? (Enter" for any zero amounts) Number of units Contribution margin per unit Total contribution margin Chair Division Cushion Division X Total Requirement 4. Review your answers for Requirements 1, 2, and 3. What is the best option for Greco Company? The best option for Greco is argin than if the division purchases cushions By having the Chair Division the current scenario (Requirement 1). internally for the Chair Division to purchase cushions intemally at the current sales price (Requirement 2) Requirement 5. Assume the supply the Chair Division with for the Chair Division to purchase cushions intemally at the current variable cost(Requirement 3). the total contribution marginwyr ers with 1,600 cushions per quarter and also g the transfer price you determined, calculate Greco Company should set the transfer price at $ because the Chair Division would not be willing to pay more than Using the transfer price you determined, calculate the total contribution margin for the quarter. Number of units X Contribution margin per unit Total contribution margin Chair Division Cushion Division-external Cushion Division-internal X Total х Requirements 1. Determine the total contribution margin for Greco Company for the quarter 2. Assume the Chair Division purchases the 1,600 cushions needed from the Cushion Division at its current sales price. What is the total contribution margin for each division and the company? 3. Assume the Chair Division purchases the 1,600 cushions needed from the Cushion Division at its current variable cost. What is the total contribution margin for each division and the company? 4. Review your answers for Requirements 1, 2 and 3. What is the best option for Greco Company? 5. Assume the Cushion Division has capacity of 3.200 cushions per quarter and can continue to supply its outside customers with 1,600 cushions per quarter and also supply the Chair Division with 1,600 cushions per quarter. What transfer price should Greco Company set? Explain your reasoning. Using the transfer price you determined, calculate the total contribution margin for the quarter Print Done

Answer 1

Solution: Greco Company: Requirement: 1 Particulars x II Number of units 1600 x 1600 x Contribution margin per unit 25 = Chair Division Cushion Division Total Total contribution margin $ 40,000.00 $ 35,200.00 S 75,200.00 22 Requirement: 2

Particulars Number of units II Contribution margin per unit 16(25+25-34) = 22 Chair Division Cushion Division Total 1600X 1600 x Total contribution margin $ 25,600.00 $ 35,200.00 S 60,800.00 = Requirement: 3 Particulars х = Chair Division Cushion Division Total Number of Contribution units margin per unit 1,600 x 38 (25+25-12) 1,600 x O (22-34+12) Total contribution margin $ 60,800.00 S S 60,800.00

Requirement: 4 The best option for Greco is the current scenario (Requirement 1). Requirement: 5 Greco Company should set the transfer price at $25; the same price the Chair Division can purchase the item from the outside. The total contribution margin does not change for the whole company when the transfer price changes, but it does affect each division's contribution margin. Particulars х Number of units 1,600 x Contribution Total contribution margin per unit margin 25 = $ 40,000.00 22= 35,200.00 13 (22-34+25) 20,800.00 S 96,000.00 Chair Division Cushion Division External Cushion Division-Internal Total 1,600 x 1600 x =S

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