The Chair Division currently purchases the cushions for $ 26 from an outside ven
ID: 2573331 • Letter: T
Question
The Chair Division currently purchases the cushions for $ 26 from an outside vendor. The Cushion Division manufactures upholstered seat cushions that are sold to customers outside the company. The Chair Division currently sells 1,000 chairs per quarter, and the Cushion Division is operating atcapacity, which is 1,000 cushions per quarter. The two divisions report the following information:
Chair Division
Cushion Division
Sales Price per Chair
$65
Sales Price per Cushion
$32
Variable Cost (other than cushion)
30
Variable Cost per Cushion
11
Variable Cost (cushion)
26
Contribution Margin per Chair
$9
Contribution Margin per Cushion
$21
Requirement 1. Determine the total contribution margin for
CutlerCutler
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 comma 0001,000
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 comma 0001,000
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
CutlerCutler
Company?
The best option for
CutlerCutler
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 2,000 cushions per quarter and can continue to supply its outside customers with 1,000 cushions per quarter and also supply the Chair Division with 1,000 cushions per quarter. What transfer price should CutlerCompany set? Explain your reasoning. Using the transfer price you determined, calculate the total contribution margin for the quarter.
Cutler 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
Chair Division
Cushion Division
Sales Price per Chair
$65
Sales Price per Cushion
$32
Variable Cost (other than cushion)
30
Variable Cost per Cushion
11
Variable Cost (cushion)
26
Contribution Margin per Chair
$9
Contribution Margin per Cushion
$21
Explanation / Answer
1
Determine the total contribution Margin For cutler
Number of units
X
Contribution Margin per unit
=
Total contribution Margin
Chair Divison
1000
$9
$9,000
Cushion Divison
1000
$21
$21,000
Total
$30,000
2
Assume the chair divison purchases the cushions needed from cushion divison at its current sales price
Number of units
X
Contribution Margin per unit
=
Total contribution Margin
Chair Divison
1000
$3[$9+$26-$32]
$3,000
Cushion Divison
1000
$21
$21,000
Total
$24,000
3
Assume the chair divison purchases the cushions needed from cushion divison at its current variable cost
Number of units
X
Contribution Margin per unit
=
Total contribution Margin
Chair Divison
1000
$24 [$9+$26-$11]
$24,000
Cushion Divison
1000
$0 [21-32+11]
$0
Total
$24,000
4
Best option for cutler cutler company is to buy from outside vendor because outside vendor generates
$2000 more in total contribution margin than if it is purchased internally
1
Determine the total contribution Margin For cutler
Number of units
X
Contribution Margin per unit
=
Total contribution Margin
Chair Divison
1000
$9
$9,000
Cushion Divison
1000
$21
$21,000
Total
$30,000
2
Assume the chair divison purchases the cushions needed from cushion divison at its current sales price
Number of units
X
Contribution Margin per unit
=
Total contribution Margin
Chair Divison
1000
$3[$9+$26-$32]
$3,000
Cushion Divison
1000
$21
$21,000
Total
$24,000
3
Assume the chair divison purchases the cushions needed from cushion divison at its current variable cost
Number of units
X
Contribution Margin per unit
=
Total contribution Margin
Chair Divison
1000
$24 [$9+$26-$11]
$24,000
Cushion Divison
1000
$0 [21-32+11]
$0
Total
$24,000
4
Best option for cutler cutler company is to buy from outside vendor because outside vendor generates
$2000 more in total contribution margin than if it is purchased internally
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