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How discrete cell type boundaries arise from morphogen signals that vary continuously across developing tissues remains incompletely understood. We use hair follicle dermal condensate (DC) formation to study a sharp developmental transition in which proliferative progenitors undergo cell cycle exit concurrent with molecular differentiation. Using genetic and genomic approaches, we show that Wnt and Hedgehog signaling coordinate separable cellular events during DC commitment. Elevated Wnt signaling promotes cell cycle exit through reduced chromatin binding of the Hedgehog mediator GLI3, while Hedgehog signaling induces differentiation genes in a Wnt-dependent manner and simultaneously elevates Wnt activity. When these responses coincide, differentiation and cell cycle exit occur together, limiting the duration and abundance of intermediate states and producing a sharp boundary. When they do not, intermediate states persist and expand, producing a graded boundary. 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