The Costa Company is decentralized, and divisions are considered investment centers. Costa 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 $18 from an outside vendor. The Cushion Division manufactures upholstered seat cushions that are sold to customers outside the company. The Chair Division currently sells 1,800 chairs per quarter, and the Cushion Division is operating at capacity, which is 1,800 cushions per quarter. The two divisions report the following information:

Requirements
1. Determine the total contribution margin for Costa Company for the quarter.
2. Assume the Chair Division purchases the 1,800 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 1,800 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 Costa Company?
5. Assume the Cushion Division has capacity of 3,600 cushions per quarter and can continue to supply its outside customers with 1,800 cushions per quarter and also supply the Chair Division with 1,800 cushions per quarter. What transfer price should Costa Company set? Explain your reasoning. Using the transfer price you determined, calculate the total contribution margin for the quarter.

Transcribed Image Text:

Chair Division Sales Price per Chair Variable Cost (other than cushion Variable Cost (cushion) Contribution Margin per Chair Cushion Division $ 34 16 S 110 Sales Price per Cushion 25 Variable Cost per Cushion 18 67 Contribution Margin per Cushion $18