The Cano Company is decentralized, and divisions are considered investment centers. Cano 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 $20 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 at capacity, which is 1,000 cushions per quarter. The two divisions report the following information:
Requirements
1. Determine the total contribution margin for Cano Company for the quarter.
2. Assume the Chair Division purchases the 1,000 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 1,000 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 Cano Company?
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 Cano Company set? Explain your reasoning. Using the transfer price you determined, calculate the total contribution margin for the quarter.