The Rossi Company is decentralized, and divisions are considered investment centers. Rossi 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.

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

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

Requirement 2. Assume the Chair Division purchases the

500

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		Contribution margin per unit	=	Total contribution margin
Chair Division				=
Cushion Division				=
Total

Requirement 3. Assume the Chair Division purchases the

500

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
Chair Division				=
Cushion Division				=
Total

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

Rossi

Company?The best option for

Rossi

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

1,000

cushions per quarter and can continue to supply its outside customers with

500

cushions per quarter and also supply the Chair Division with

500

cushions per quarter. What transfer price should

Rossi

Company set? Explain your reasoning. Using the transfer price you determined, calculate the total contribution margin for the quarter.

Rossi 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		Contribution margin per unit	=	Total contribution margin
Chair Division				=
Cushion Divisionexternal				=
Cushion Divisioninternal				=
Total

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

500

chairs per quarter, and the Cushion Division is operating at capacity, which is

500

cushions per quarter. The two divisions report the following information:

Chair Division		Cushion Division
Sales Price per Chair	$80	Sales Price per Cushion	$30
Variable Cost (other than cushion)	30	Variable Cost per Cushion	9
Variable Cost (cushion)	26
Contribution Margin per Chair	$24	Contribution Margin per Cushion	$21