Question

Clear windows manufacturers windows for the home building industry. The window frames are produced in the frame division. The frames are then transferred to the glass division, where the glass and hardware are installed. The company's best selling product is a 1×1.2 metre, double-paned window. The standard cost of the window is detailed as follows;

  

	Frame Division	Glass Divsion
Direct Material	45	90
Direct Labour	60	45
Variable Overhead	90	90
Total Standard cost	195	225

The frame Division can also sell frames directly to custom home builders, who install the glass and hardware. The sales price for a frame is 240. The glass division sells its finished windows for $570.

Required:

1. Assume that there is no spare capacity in the frame division.

a) Use the general rule to calculate the transfer price for window frames.

b) Calculate the transfer price if it is based on standard variable cost with a 10 per cent markup.

2. Assume that there is spare capacity in the frame division.

a) Use the general rule to calculate the transfer price for window frames

b) Expalin why your answers to requirements 1(a) and b(a) differ

c) Suppose that the predetermined fixed Overhead rate in the frame division is 125% of direct Labour. Calculate the transfer price if it is based on standard on absorption cost plus a 10 per cent markup.

d) Assume the transfer price established in requirement 2(c) is used. The glass division has been approached by the management of a commercial construction company with a special order for 1000 windows at $465 each. For the perspective of Clear windows as a whole, should the special order be accepted or rejected? Explain your answer.

Answer 1