The Greco Company is decentralized, and divisions are considered investment centers. Greco 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 $25 from an outside vendor. The Cushion Division manufactures upholstered seat cushions that are sold to customers outside the company. The Chair Division currently sells 1,600 chairs per quarter, and the Cushion Division is operating atcapacity, which is 1,600 cushions per quarter. The two divisions report the following information:

Chair Division			Cushion Division
Sales Price per Chair	$100		Sales Price per Cushion	$34
Variable Cost (other than cushion)	50		Variable Cost per Cushion	12
Variable Cost (cushion)	25
Contribution Margin per Chair	$25		Contribution Margin per Cushion	$22

Requirement 1. Determine the total contribution margin for Greco Company for the quarter.

	Number of units	x	Contribution margin per unit	=	Total contribution margin
Chair Division		x		=
Cushion Division		x		=
Total

Requirement 2. Assume the Chair Division purchases the 1,600 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		x		=
Cushion Division		x		=
Total

Requirement 3. Assume the Chair Division purchases the 1,600 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		x		=
Cushion Division		x		=
Total

Requirement 4. Review your answers for Requirements 1, 2, and 3. What is the best option for Greco Company?The best option for Greco is

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

less

more

in total contribution margin than if the division purchases cushions internally.Requirement 5. Assume the Cushion Division has capacity of 3,200 cushions per quarter and can continue to supply its outside customers with 1,600cushions per quarter and also supply the Chair Division with 1,600 cushions per quarter. What transfer price should Greco Company set? Explain your reasoning. Using the transfer price you determined, calculate the total contribution margin for the quarter.

Greco 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 Divisionexternal		x		=
Cushion Divisioninternal		x		=
Total