om the P24-23A (similar to) The Costa Company is decentralized, and divisions are considered investment Centers Costa has one division that masuachures ok dining room chairs with upholstered seat cushions. The Char Division classembles, and finishes the cak chairs and the purchases and taches Click the icon to view additional information) the seat cushion Read the rements Requirement 1. Determine the total contribution margin tor Costa Company for the quarter Number of units * Contribution margin perut. Total contribution margin Chair Division Cushion Division Requirements More info 1. Dumine the contribution marito Costa Company for the quarter The Chair Division currently purchases the cushions for $20 from outside vender. The Cushion 2. As the Char Division purchases the 1.800 cushions needed from the Division manufactures upholstered seat cushions that are sold to customers outside the company Cushion Division is not a priceWhat is the total corbution The Chair Division Currenty of 1.800 chains per Quarter, and the Chion Division is operating at magn for each vision and the company capacity, which is 1,600 custo per quarter. The two division report the following information: Chair Division Cushion Division man for a division and the company Sale Price per Char Sale Prices Chien for Variable Cost one han cus) 56 Vrable Cost per Cushion & Aune heunion Division has capacity 3.000 urina per quwwind 26 Variable Cost can continue to supply to ride customers wh 1.800 cushiore per quarter and supply the Car Division with 10 china per quanto What 18 Contribution Marpin per Char Contribution Margin per Cushion transfer price would Costa Company wat? Explain your reasoning Using the transfer price you determined, calculate the total contribution margin for the 14 Print Done Print Done Read the requirements om 0 Help Me Solve This argit Question Help on The Costa Company is decentralized, and divisions are considered (Click the icon to view additional information.) investment centers. Costa has one division that manufactures oak dining room chairs with upholstered seat cushions. The Chair Read the requirements Division cuts, assembles, and finishes the oak chairs and then purchases and attaches the seat cushions. When companies decentralize, one responsibility center may transfer goods to another responsibility center within the company. The transfer price is the transaction amount of one unit of goods when the transaction occurs between divisions within the same company. 3 free The primary objective in setting transfer prices is to achieve goal congruence by selecting a price that will maximize overall company old profits. A secondary objective is to evaluate the managers of the responsibility centers involved. Achieving these objectives can be and challenging because the managers have different objectives for their divisions. The manager of the division selling the product wants the Lion highest transfer price in order to increase revenues for that division, which will increase division profits. The manager of the purchasing division wants the lowest transfer price in order to decrease costs, which will increase profits for that division. If one manager wants the highest transfer price and the other manager wants the lowest transfer price, there is a conflict prie Requirement 1. Determine the total contribution margin for Costa Company for the quarter. ed In this Requirement, we are asked to determine the overall company profits under the current scenario. The Chair Division is currently selling 1,100 chairs per quarter with a contribution margin of $53 per chair. The Cushion Division is currently selling 1,100 cushions per quarter with a contribution margin of $16 per cushion. Use the table below to calculate the contribution margin for each division and for outi the company as a whole Number of units * Contribution margin per unit Total contribution margin 1,100 x $ 53 58,300 Cushion Division 1.100 16 $ 17,600 $ 75,900 This question is complete. Move your cursor over or tap on the red arrows to see incorrect answers. All parts showing Close Chair Division Tata able Chair Division an re Requirement 2. Assume the Chair Division purchases the 1.100 cushions needed from the Cushion Division at its current sales price. What is the total contribution margin for each division and the company? The Cushion Division currently sells each cushion to outside customers for $26. If the Chair Division purchases the cushions at this price, 26 fin how does this impact each division's contribution margin as well as the overall company profits? There would be no change to the sold Cushion Division's contribution margin since it would be collecting the same sales price per cushion that it is currently collecting from and outside customers. The Chair Division, though, would be paying $26 per cushion rather than its current cost of $22 per cushion to an wision outside vendor. Calculate the Chair Division's contribution margin.per unit under this scenario and complete the table to determine the total contribution margin Thion Number of units * Contribution margin per unit = Total contribution margin s Prid 1,100 x $ 49 53,900 Cushion Division 1,100 x $ 16 17,600 Total 71,500 Requirement 3. Assume the Chair Division purchases the 1,100 cushions needed from the Cushion Division at its current variable cost. What is the total contribution margin for each division and the company? Under this scenario, the Chair Division would pay $10 per cushion instead of its current cost of $22 per cushion, but the Cushion Division would collect only $10 per cushion instead of its current sales price of $26 per cushion. How does this impact each of the divisions as well as the company as a whole? Calculate the Chair Division's contribution margin.per unit and the This question is complete. Move your cursor over or tap on the red arrows to see incorrect answers. All parts showing Close the tributi ne ? wer. Clear All Requirement 3. Assume the Chair Division purchases the 1,100 cushions needed from the Cushion Division at its current variable cost. What is the total contribution margin for each division and the company? Under this scenario, the Chair Division would pay $10 per cushion instead of its current cost of $22 per cushion, but the Cushion Division I would collect only $10 per cushion instead of its current sales price of $26 per cushion. How does this impact each of the divisions as well as the company as a whole? Calculate the Chair Division's contribution margin per unit and the nd Cushion Division's contribution margin.per unit under this scenario and complete the table to determine the total contribution margins. en (Enter "0" for any zero amounts.) Number of units Contribution margin per unit Total contribution margin hic Chair Division x $ 65 $ 71,500 Cushion Division 1,100 x $ 0 $ 0 Total $ 71,500 Se oluntat de 1.100 In many cases, the amount of the transfer price does not affect overall company profits because it is revenue for one division and an expense for the other division. Therefore, when profits for all divisions are consolidated, the amounts offset each other and the net effect is zero. In the steps above, we can see that changing the transfer price from $26 per cushion (Requirement 2) to $10 per cushion (Requirement 3) did not change the total contribution margin of the company as a whole, but each division's separate contribution margins either increased or decreased as a result of the change in transfer price. 526 fn e sold er, and ivision $ Shion es Pric iable Requirement 4. Review your answers for Requirements 1, 2, and 3. What is the best option for Costa Company? Recall that the primary objective in setting transfer prices is to achieve goal congruence by selecting a price that will maximize overall company profits. Review your answers for Requirements 1, 2 and 3: Costa's total contribution margin Requirement 1 (cushions purchased from an outside vendor) $ 75,900 Requirement 2 (cushions purchased internally at sales price) 71,500 Requirement 3 (cushions purchased internally at variable cost) $ 71,500 The best option for Costa Company is the one which generates the most total contribution margin for the company as a whole. Which option achieves this objective? Requirement 5. Assume the Cushion Division has capacity of 2,200 cushions per quarter and can continue to supply its outside customers with 1,100 cushions per quarter and also supply the Chair Division with 1,100 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 What transfer price should Costa Company set? Explain your reasoning, and rter the ie entributi one Question Help The Costa Company is decentralized, and divisions are considered (Click the icon to view additional information.) investment centers. Costa has one division that manufactures oak dining room chairs with upholstered seat cushions. The Chair Read the requirements Division cuts, assembles, and finishes the oak chairs and then purchases and attaches the seat cushions What transfer price should Costa Company set? Explain your reasoning. The Cushion Division will want the highest transfer price in order to increase revenues for that division, which will increase division profits. The Chair Division will want the lowest transfer price in order to decrease costs, which will increase profits for that division. The Cushion Division would not be willing to sell the cushions for less than $10 (it's variable cost per cushion) because any amount less than that will cause a negative contribution margin. The Chair Division would not be willing to purchase the cushions for more than $22 (the amount the cushions can be purchased for in the market). The range of $10 to $22 is the negotiable range for the transfer price. Let's now discuss how production capacity plays a role in the transfer price decision If the Cushion Division is operating at capacity, it has to make a choice about who to sell to: customers outside the company or the Chair Division. If the division must choose, the transfer price should be a market-based transfer price. If the Cushion Division is operating below capacity (as assumed here in Requirement 5), then it should be willing to sell cushions at any price above its variable cost ($10) cost-based transfer price Since the Cushion Division has enough capacity to supply its outside customers in addition to supplying the Chair Division, it should be willing to accept the maximum price that the Chair Division is willing to pay, $22 per cushion Using the transfer price you determined, calculate the total contribution margin for the quarter. We know from the information given that the Chair Division's contribution margin per chair is $53 when the variable cost is $22 per cushion. We also know that the Cushion Division's contribution margin per cushion is $16 when it sells to outside customers. We have already calculated each division's total contribution margin with these amounts, so they have been entered in the table below for you. Calculate the Cushion Division's contribution margin.per unit on the cushions it sells to the Chair Division for $22 each and then complete the table to determine the company's total contribution margin. This question is complete. Move your cursor over or tap on the red arrows to see incorrect answers. ang rter the le Close All parts showing The Costa Company is decentralized, and divisions are considered (Click the icon to view additional information.) investment centers. Costa has one division that manufactures oak dining room chairs with upholstered seat cushions. The Chair Read the requirements Division cuts, assembles, and finishes the oak chairs and then purchases and attaches the seat cushions. ), , Division. If the division must choose the transfer price should be a market-based transfer price. If the Cushion Division is operating below capacity (as assumed here in Requirement 5), then it should be willing to sell cushions at any price above its variable cost ($10)--cost-based transfer price. 3 Since the Cushion Division has enough capacity to supply its outside customers in addition to supplying the Chair Division, it should be sold willing to accept the maximum price that the Chair Division is willing to pay, $22 per cushion and sion Using the transfer price you determined, calculate the total contribution margin for the quarter. ion We know from the information given that the Chair Division's contribution margin per chair is $53 when the variable cost is $22 per cushion. We also know that the Cushion Division's contribution margin per cushion is $16 when it sells to outside customers. We have Pric already calculated each division's total contribution margin with these amounts, so they have been entered in the table below for you. pled Calculate the Cushion Division's contribution margin per unit on the cushions it sells to the Chair Division for $22 each and then complete the table to determine the company's total contribution margin, Number of units Contribution margin per unit - Total contribution margin ibuti Chair Division 1,100 X $ 53 58,300 Cushion Division external 1.100 16 17,600 Cushion Division-Internal 1,100 X $ 12 13,200 Total 89,100 in and rter x the le 10