(JUST NEED HELP WITH THE LAST REQUIRMENT 5 PLEASE) The Cutler Company is decentr
ID: 2574218 • Letter: #
Question
(JUST NEED HELP WITH THE LAST REQUIRMENT 5 PLEASE) The Cutler Company is decentralized, and divisions are considered investment centers. Cutler 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
$ 26$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 comma 0001,000
chairs per quarter, and the Cushion Division is operating atcapacity, which is
1 comma 0001,000
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
1000
x
9
=
9000
Cushion Division
1000
x
21
=
21000
Total
30000
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
1000
x
3
=
3000
Cushion Division
1000
x
21
=
21000
Total
24000
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
1000
x
24
=
24000
Cushion Division
1000
x
0
=
0
Total
24000
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).
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
more
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 Cutler
Company 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
Answer 1. No. of units X Contribution Margin Per Unit = Total Contribution Margin Chair Division 1,000 X 9 = 9,000 Cushion Division 1,000 X 21 = 21,000 Total 30,000 Answer 2. No. of units X Contribution Margin Per Unit = Total Contribution Margin Chair Division 1,000 X 3 = 3,000 Cushion Division 1,000 X 21 = 21,000 Total 24,000 Answer 3. No. of units X Contribution Margin Per Unit = Total Contribution Margin Chair Division 1,000 X 24 = 24,000 Cushion Division 1,000 X - = - Total 24,000 Answer 4. The best option for Cutler is the current scenario (Requirement 1). In this scenerio Total Contribution is maximum. Answer 5. Cutler Company should set the transfer price at $26, the price at which the chair division can purchase the cushion from the outside vendor, because the Chair Division would not be willing to pat more than the purchase cost from outside vendor. No. of units X Contribution Margin Per Unit = Total Contribution Margin Chair Division 1,000 X 9 = 9,000 Cushion Division External 1,000 X 21 = 21,000 Internal Transfer 1,000 X 15 = 15,000 Total 45,000
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