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Requirements:

1. Determine the total contribution margin for Hobson Company for the quarter.

2. Assume the Chair Division purchases the 1,200 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 1,200 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 the Requirements 1,2, and 3. What is the best option for Hobson Company?

5. Assume the Cushion Division has capacity of 2,400 cushions per quarter and can continue to supply its outside customers with 1,200 cushions per quarter and also supply the Chair Division with 1,200 cushions per quarter. What transfer price should Hobson Company set? Explain your reasoning. Using the transfer price you determined, calculate the total contribution margin for the quarter.

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 1,200 chairs per quarter, and the Cushion Division is operating at capacity, which is 1,200 cushions per quarter. The two divisions report the following information:

Chair Division	Cushion Division
Sales Price per Chair $100	Sales Price per Cushion $30
Variable Cost (other than cushion) $55	Variable Cost per Cushion $16
Variable Cost (cushion) $26	--------
Contribution Margin per chair $19	Contribution Margin per Cushion $14

I have solved Requirement 1 (Determine the total contribution margin for Hobson Company for the quarter.)

Number of units x Contribution margin per unit Total contribution margin

Chair Division 1,200 x $ 19 = $ 22,800

Cushion Division 1,200 x $ 14 = $ 16,800

$ 39,600

Solve Requirements 2 through 5.

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