Element Corporation has 2 divisions: The Cushion Division and
the Chair Division. You are the Vice President in charge of the
Cushion Division. Your Cushion Division is a profit center.
Each division has its own markets; that is, your Cushion Division
sells cushions on the open market to outside customers at a price
of $150 per cushion. The Chair Division makes chairs, and in
connection with that, buys slightly cheaper quality cushions on the
open market for $118 each. You happen to have excess capacity
available in your Cushion Division.
Your accounting department has come up with the following unit
costs associated with the production of one cushion:
Direct materials $
15.00
Direct labor
10.00
Variable overhead
8.00
Fixed overhead
12.00
Variable selling
6.00
Fixed selling
2.00
Variable administrative 4.00
Fixed administrative
3.00
$ 60.00
You have been approached by the Chair Division. They are in a very
competitive market and are seeking to obtain cushions at a better
price than the current $118 market price. Since you are all part of
the same company, they figure that perhaps your Cushion Division
can help.
Your accounting department has also figured out that there will be
some cost savings should you produce cushions for the Chair
Division. Specifically, variable selling will be reduced by 80%,
variable administrative expenses will be cut by 50% while direct
materials will be slashed by 30% because the cushion they use is of
lesser quality than your normal one.
Your Cushion Division is a profit center. What does that
mean? You have been given complete discretion in terms of
negotiating a workable price at which to produce these cushions for
the Chair Division.
What is minimum acceptable price that you would be willing to
charge the Chair Division?
Let’s say you are now operating AT CAPACITY and are already selling
all the cushions you can manufacture on the open market. Does this
change anything? NOW what is the minimum price that you would be
willing to charge? Why does this differ from your first
answer?
Element Corporation has 2 divisions: The Cushion Division and the Chair Division. You are the Vice...
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