The Lin Company is decentralized, and divisions are considered investment centers. Lin 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 $18 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 $ 90 Sales Price per Cushion $ 20 Variable Cost (other than cushion) 45 Variable Cost per Cushion 12 Variable Cost (cushion) 18 Contribution Margin per Chair $ 27 Contribution Margin per Cushion $ 8 Requirements 1. Determine the total contribution margin for Lin 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 Lin 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 Lin Company set? Explain your reasoning. Using the transfer price you determined, calculate the total contribution margin for the quarter.
The Lin Company is decentralized, and divisions are considered investment centers. Lin 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 $18 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 $ 90 Sales Price per Cushion $ 20 Variable Cost (other than cushion) 45 Variable Cost per Cushion 12 Variable Cost (cushion) 18 Contribution Margin per Chair $ 27 Contribution Margin per Cushion $ 8 Requirements 1. Determine the total contribution margin for Lin 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 Lin 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 Lin Company set? Explain your reasoning. Using the transfer price you determined, calculate the total contribution margin for the quarter.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Determining transfer pricing
The Lin Company is decentralized, and divisions are considered investment centers. Lin 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 $18 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
$ 90
Sales Price per Cushion
$ 20
Variable Cost (other than cushion)
45
Variable Cost per Cushion
12
Variable Cost (cushion)
18
Contribution Margin per Chair
$ 27
Contribution Margin per Cushion
$ 8
Requirements
1. Determine the total contribution margin for Lin 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 Lin
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 Lin Company set? Explain
your reasoning. Using the transfer price you determined, calculate the total contribution
margin for the quarter.
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