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 at capacity, which is 1,000 cushions per quarter. The two divisions report the following information: Chair Division Cushion Division $ Sales Price per Chair 105 Sales Price per Cushion 30 Variable Cost (other than cushion) 35 Variable Cost per Cushion 12 26 Variable Cost (cushion) 44 18 Contribution Margin per Chair Contribution Margin per Cushion EA Requirement 1. Determine the total contribution margin for Coley Company for the quarter. Total contribution margin Contribution margin per unit Number of units X = Chair Division Cushion Division - Total Requirement 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? Contribution margin per unit Total contribution margin Number of units Chair Division - Cushion Division X Total Requirement 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? (Enter "0" for any zero amounts.) Number of units Contribution margin per unit Total contribution margin X Chair Division X Cushion Division Total Requirement 4. Review your answers for Requirements 1, 2, and 3. What is the best option for Coley Company? The best option for Coley is in total contribution margin than if the division By having the Chair Division purchase the cushions from an outside vendor, the company would generate 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 Coley Company set? Explain your reasoning. Using the transfer price you determined, calculate the total contribution margin for the quarter. Coley 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. Total contribution margin Contribution margin per unit Number of units X Chair Division Cushion Division-external Cushion Division-internal X - Total
