The Hernandez Company is decentralized, and divisions are considered investment centers. Hernandez 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 $32 from an outside vendor. The Cushion Division manufactures upholstered seat cushions that are sold to customers outside the company. The Chair Division currently sells 1,800 chairs per quarter, and the Cushion Division is operating at capacity; which is 1,800 cushions per quarter. The two divisions report the following information:
Requirements
- 1. Determine the total contribution margin for 1 Hernandez Company for the quarter.
- 2. Assume the Chair Division purchases the 1,800 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 1,800 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 Hernandez Company?
- 5. Assume the Cushion Division has capacity of 3,600 cushions per quarter and can continue to supply its outside customers with 1,800 cushions per quarter and also supply the Chair Division with 1,800 cushions per quarter. What transfer price should Hernandez Company set? Explain your reasoning. Using the transfer price you determined, calculate the total contribution margin for the quarter.
Want to see the full answer?
Check out a sample textbook solutionChapter 24 Solutions
Horngren's Financial & Managerial Accounting, The Managerial Chapters (6th Edition)
Additional Business Textbook Solutions
Advanced Financial Accounting
Managerial Accounting: Creating Value in a Dynamic Business Environment
Accounting For Governmental & Nonprofit Entities
Managerial Accounting
Financial Accounting
FINANCIAL ACCT.FUND.(LOOSELEAF)
- Bostonian Inc. has a number of divisions, including the Delta Division and the Listen Now Division. The Listen Now Division owns and operates a line of MP3 players. Each year, the Listen Now Division purchases component AZ in order to manufacture the MP3 players. Currently, it purchases this component from an outside supplier for $6.50 per component. The manager of the Delta Division has approached the manager of the Listen Now Division about selling component AZ to the Listen Now Division. The full product cost of component AZ is $3.10. The Delta Division can sell all of the component AZs it makes to outside companies for $6.50. The Listen Now Division needs 18,000 component AZs per year; the Delta Division can make up to 60,000 components per year. Required: A. Which division sets the maximum transfer price? Which division sets the minimum transfer price? Maximum Minimum B. Suppose the company policy is that all transfer take place at full cost. What is the transfer…arrow_forwardAulman Inc. has a number of divisions, including a Furniture Division and a Motel Division. The Motel Division owns and operates a line of budget motels located along major highways. Each year, the Motel Division purchases furniture for the motel rooms. Currently, it purchases a basic dresser from an outside supplier for $40. The manager of the Furniture Division has approached the manager of the Motel Division about selling dressers to the Motel Division. The full product cost of a dresser is $29. The Furniture Division can sell all of the dressers it makes to outside companies for $40. The Motel Division needs 10,000 dressers per year; the Furniture Division can make up to 50,000 dressers per year. Required: 1. Which division sets the maximum transfer price? Which division sets the minimum transfer price? The maximum transfer price The minimum transfer price 2. Suppose the company policy is that all transfers take place at full cost. What is the transfer price? 3.…arrow_forwardAulman Inc. has a number of divisions including a Furniture Division and a Motel Division. The Motel Division owns and operates a line of budget motels located along major highways. Each year, the Motel Division purchases furniture for the motel rooms. Currently, it purchases a basic dresser from an outside supplier for $60. The manager of the Furniture Division has approached the manager of the Motel Division about selling dressers to the Motel Division. The full product cost of a dresser is $29. While the Furniture Division has been operating at capacity (50,000 dressers per year) and selling them for $60 each, it expects to produce and sell only 40,000 dressers for $60 each next year. The Furniture Division incurs variable costs of $16 per dresser. The Motel Division needs 10,000 dressers per year; the Furniture Division can make up to 50,000 dressers per year. The company policy is that all transfer prices are negotiated by the divisions involved. Required: 1. What is the maximum…arrow_forward
- Aulman Inc. has a number of divisions including a Furniture Division and a Motel Division. The Motel Division owns and operates a line of budget motels located along major highways. Each year, the Motel Division purchases furniture for the motel rooms. Currently, it purchases a basic dresser from an outside supplier for $60. The manager of the Furniture Division has approached the manager of the Motel Division about selling dressers to the Motel Division. The full product cost of a dresser is $29. While the Furniture Division has been operating at capacity (50,000 dressers per year) and selling them for $60 each, it expects to produce and sell only 40,000 dressers for $60 each next year. The Furniture Division incurs variable costs of $16 per dresser. The Motel Division needs 10,000 dressers per year; the Furniture Division can make up to 50,000 dressers per year. The company policy is that all transfer prices are negotiated by the divisions involved. Required: 1. What is the maximum…arrow_forwardGutierrez Company makes various electronic products. The company is divided into a number of autonomous divisions that can either sell to internal units or sell externally. All divisions are located in buildings on the same piece of property. The Board Division has offered the Chip Division $21 per unit to supply it with chips for 40,000 boards. It has been purchasing these chips for $22 per unit from outside suppliers. The Chip Division receives $22.50 per unit for sales made to outside customers on this type of chip. The variable cost of chips sold externally by the Chip Division is $14.50. It estimates that it will save $4.50 per chip of selling expenses on units sold internally to the Board Division. The Chip Division has no excess capacity. (a) Calculate the minimum transfer price that the Chip Division should accept. (Round answers to 0 decimal places. e.g. 10.) Minimum transfer price $ Should Chip Division accept the offer? (b) Suppose that the Chip Division decides to reject…arrow_forwardGutierrez Company makes various electronic products. The company is divided into a number of autonomous divisions that can either sell to internal units or sell externally. All divisions are located in buildings on the same piece of property. The Board Division has offered the Chip Division $21 per unit to supply it with chips for 40,000 boards. It has been purchasing these chips for $22 per unit from outside suppliers. The Chip Division receives $22.50 per unit for sales made to outside customers on this type of chip. The variable cost of chips sold externally by the Chip Division is $14.50. It estimates that it will save $4.50 per chip of selling expenses on units sold internally to the Board Division. The Chip Division has no excess capacity. (a) Calculate the minimum transfer price that the Chip Division should accept. (Round answers to O decimal places. e.g. 10.) Minimum transfer price $ Should Chip Division accept the offer? (b) Yes Suppose that the Chip Division decides to…arrow_forward
- Determining transfer pricing The Harris Company is decentralized, and divisions are considered investment centers. Harris 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 $22 from an outside vendor. The Cushion Division manufactures upholstered seat cushions that are sold to customers outside the company. The Chair Division currently sells 800 chairs per quarter, and the Cushion Division is operating at capacity, which is 800 cushions per quarter. The two divisions report the following information: Requirements Determine the total contribution margin for Harris Company for the quarter. Assume the Chair Division purchases the 800 cushions needed from the Cushion Division at its current sales price. What is the total contribution margin for each division and the company? Assume…arrow_forwardSarasota Company makes various electronic products. The company is divided into a number of autonomous divisions that can either sell to internal units or sell externally. All divisions are located in buildings on the same piece of property. The Board Division has offered the Chip Division $24 per unit to supply it with chips for 36,000 boards. It has been purchasing these chips for $25 per unit from outside suppliers. The Chip Division receives $27.80 per unit for sales made to outside customers on this type of chip. The variable cost of chips sold externally by the Chip Division is $17.80. It estimates that it will save $4.80 per chip of selling expenses on units sold internally to the Board Division. The Chip Division has no excess capacity. (a) Calculate the minimum transfer price that the Chip Division should accept. (Round answers to O decimal places. e.g. 10.) Minimum transfer price $ Should Chip Division accept the offer? (b) Suppose that the Chip Division decides to reject the…arrow_forwardAZChen Company manufactures one particular type of washing machine and has two divisions, the Compressor Division, and the Fabrication Division. The Compressor Division manufactures compressors for the Fabrication Division, which completes the washing machine and sells it to retailers. The Compressor Division "sells" compressors to the Fabrication Division. The market price for the Fabrication Division to purchase a compressor is $40.00. (Ignore changes in inventory.) The fixed costs for the Compressor and Fabrication Divisions are assumed to be the same over the range of 1,000 - 5,000 units. Compressor's costs per compressor are: Direct materials $15 Direct labour $7.30 Variable overhead $2.69 Division fixed costs $7.48 Fabrication's costs per completed washing machine are: Direct materials $140.00 (excluding the transfer price of the compressor) Direct labour $57.50 Variable overhead $23.00 Division fixed costs $8.00 Assume the transfer price for a compressor is 149% of total costs…arrow_forward
- Nogo Motors, Inc., has several divisions that often purchase component parts from each other. The company is fully decentralized and each division is selling to other divisions or in outside markets. Each division makes its decision on where to buy and sell in conformity with divisional goals. Igo Division purchases most of its airbags from Letgo Division. The managers of these two divisions are currently negotiating a transfer price for the airbags for next year, when the airbag will be standard equipment on all Igo vehicles. Letgo Division prepared the following financial information for negotiating purposes: Costs of airbag as manufactured by Letgo: Direct materials costs P 40 55 Direct manufacturing labor costs Variable manufacturing overhead costs 10 Fixed manufacturing overhead costs Variable marketing costs Fixed marketing costs Fixed administrative costs Total costs 25 5 15 10 P160 Letgo Division is currently working at 80% of its capacity. Letgo's policy is to achieve an…arrow_forwardThe Compressor Division and the Fabrication Division of Plash Company, which exclusively produces one type of washing machine, respectively, are its two divisions. For the Fabrication Division, which completes the washing machine and sells it to retailers, the Compressor Division makes compressors. The Fabrication Division buys compressors from the Compressor Division. The Fabrication Division will spend $40.00 on a compressor, which is the market price. (Skip updates to the inventory.) It is expected that the fixed costs for the Compressor Division remain constant for orders between 5,000 and 10,000 units. The Fabrication Division's fixed expenses are estimated to be $7.50 per unit at 10,000 units. Compressor's costs per compressor are: Direct materials $15.00 Direct labor $7.25 Variable overhead $3.00 Division fixed costs $7.50 Fabrication's costs per completed air conditioner are: Direct materials $150.00 Direct labor $62.50 Variable overhead $20.00 Division fixed costs $7.50 Assume…arrow_forwardProduction of sofas at the Cosyhome factory depends on two highly autonomous divisions within the firm. The Woodie division is responsible for manufacturing the wooden chair frame and the Softie division produces the fabric to cover the chairs. Cosyhome operates in a very seasonal and highly competitive market and therefore is keen to implement improvements to its products. One such improvement is a revolutionary new nylon fabric. The Softie division has been asked by the Woodie division to produce the fabric for 4,000 chairs. If Softie meets this request, it will have to reduce output of its existing fabric which it currently sells to firms outside Cosyhome at £15 per metre. This is also the price Woodie must pay for any material purchased from Softie. No external market is expected to be available for the highly specialised nylon fabric. Woodie anticipates that chairs made with the new material will be sold for £23.90 more than at present. Market resistance to higher prices will…arrow_forward
- Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage LearningManagerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College PubFinancial And Managerial AccountingAccountingISBN:9781337902663Author:WARREN, Carl S.Publisher:Cengage Learning,
- Managerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage LearningEssentials of Business Analytics (MindTap Course ...StatisticsISBN:9781305627734Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. AndersonPublisher:Cengage Learning