Question

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.

The Chair Division currently purchases the cushions for $25 from an outside vendor. The Cushion Division manufactures upholstered seat cushions that are sold to customers outside the company. The Chair Division currently sells 1,600 chairs per​ quarter, and the Cushion Division is operating at​capacity, which is 1,600 cushions per quarter. The two divisions report the following​ information:

Chair Division			Cushion Division
Sales Price per Chair	$100		Sales Price per Cushion	$34
Variable Cost (other than cushion)	50		Variable Cost per Cushion	12
Variable Cost (cushion)	25
Contribution Margin per Chair	$25		Contribution Margin per Cushion	$22

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		x		=
Cushion Division		x		=
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 "0" for any zero​ amounts.)

	Number of units	x	Contribution margin per unit	=	Total contribution margin
Chair Division		x		=
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

▼

the current scenario (Requirement 1).

for the Chair Division to purchase cushions internally at the current sales price (Requirement 2).

for the Chair Division to purchase cushions internally at the current variable cost (Requirement 3).

By having the Chair Division purchase the cushions from an outside​ vendor, the company would generate

▼

less

more

in total contribution margin than if the division purchases cushions internally.Requirement 5. Assume the Cushion Division has capacity of 3,200 cushions per quarter and can continue to supply its outside customers with 1,600cushions 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.

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		x		=
Cushion Division—external		x		=
Cushion Division—internal		x		=
Total

Answer 1

22 TQD ster Paicing cters to the setting of Phze Services and 900ds between an enlenPise TKanste Bice and the for legal af 9oads when the transadion odurs brtoee the divsons uothin the erfflies Transfe Patce 1s the bansarlion amout of one meo sure Pertaining the company to 1s ndertake0. ts Anthis Case Cortbution etens to the to which evaluation of the abrty of CoveRing the acertained by Substrading vania ble cost fro he selng Pnice There fove, Computetron of the tolal contaibution Margi) for chais and Cushion dtvision af (oPany ts shoun belw Variable costwh uE Venue hotal (onbibtiny margin 40,000 $35,200 contibution Manqin Per unit Contibution Manin units for the quantes chair Divistan l600 1600 $85 Cushion Division Total Thene fore, it is ascertained that the to tel Contibution 5,200 5,200 margin accaunts fo 2- The total Contibution oangn o Chat and Cushion aursion of Gneco Company s Conputed when then chair division Ruichases fror the at 4s manket Paice Cushion division aLS Shouon be low: Contribulion Marg units Contibution Marg Total Contibution for the quarter chain Division Cushion Dision Total There fore, it is ascentoined that the tatal, Contibution Per unit Margin $16195A25-34 422 1600 33200 60800 margin accounts for

The total contbutbn margrn to chain and cushton division of Gneco Cempany 1s com Puted when the chain division funcha Ses trom the cushion divsion at Variable ie Conhibulion Margin Units Contibuton man for the quarter 71 be low: s shown Total lonlthutir Per untt $ Las4 25-12 AO [22412-3u nangio $60800 chair Division Cushion Division Total There loves it is ascertained thal the tolal cootibutton 1600 16c0 4 0 $60800 margin acceunts for 60800 S Afe nevieuwing the Arquhement ,2and 3 the best option for the chai Division of Gneco company is the Cuanent ot buying from audside Veodox. lhen chain Divi's ton Scenario the Cushion to an Purchase outside VendoY, the Lomany 432 00 more io total conti butian marqio than Remerates cushions internaly division Pucha Sed 5 Greco com Pany shauld set the range ct the Vasiable cost to the Contaibution margin does not change for the uwhole company when he tuansfer Bice changes, burt Tt does ofleit each deuts ton's Contet bution margin the transfe Pice at $12 lo 425, Outside Pce. The total Conthibution margi Units cootibutfon magtoTo tal cont bu tton for the quarter chair Diviston margin 4t0000 $ 35,200 Per unit $25 * 1600 1600 Cushion Diviston external 20800 A1B22425-34 1600 Cushion Division- 7ertennal $96,000 e to To tal There fore, t is asertained that the tolal lonibrlion mangin accounts for 96000