Question

clearview window company manufacures 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 three-by-four-foot, double paned operable window. The Frame Division also can seel frames directly to custom home builders, who install the glass and hardware. The sales price for a frame is $180. The Glass division sells its finished windows for $400. The markets for both frames and finished windows exhibit perfect competition. The standard variable cost of the window is detailed as follows:

	Frame Division	Glass Division
Direct Material	$32	$58*
Direct Labor	$50	$32
Variable Overhead	$58	$58
Total	$140	$148

* Not including the transfer price for the frame

Assume that there is no excess capacity in the Frame Division.

1a. Use the general rule to compute the transfer price for window frames.

1b. Calculate the transfer price if it is based on standard variable cost with a 10 percent markup.

1a. Transfer price	?
1b. Transfer price	?

2a. Assume that there is excess capacity in the Frame Division. Use the general rule to compute the transfer price for window frames.

2c. Suppose the predetermined fixed-overhead rate in the Frame Division is 120 percent of direct-labor cost. Calculate the transfer price if it is based on standard full cost plus a 10 percent markup.

2d. The Glass Division has been approached by the U.S. Army with a special order for 1,200 windows at $328. Assume the transfer price established in requirement 2c above is being used. What is the incremental contribution (loss) per window for Clearview Window Company as a whole if this special order is accepted? From the perspecive of Clearview Window Company as a whole, should the special order be accepted or rejected?

2e. The Glass Division has been approached by the U.S. Army with a special order for 1,200 windows at $328. Assume the transfer price established in requirement 2c about is being used. What is the incremental contribution (loss) per window for Clearview Window Company as a whole if this special order is accepted? Will an autonomous Glass Division manager accept or reject the special order?

Answer 1

1a.

Transfer price = cost incurred + opportuinity cost (sales price - total cost)

= 140 + 40(180-140) = $180

it is basically the normal sellinfg price since there is no excess capacity inframe division.

1b

transfer price = Standard variable cost + 10% of standard variable cost

= 140 + .1X140 = $154

2a.

Transfer price = cost incurred = $140

Since there is excess capacity in the frame divsion , transfer price would be the cost incuured.

2c

fixed overhead per frame .= 120% of direct labor cost i.e 120 % X 50 = 60

Transferprice = variable cost + fixed overhead + 10 % ( variable cost + fixed overhead per frame)

= 140 + 60 + 10 % (140 + 60 ) = $ 220

2d.

Contribtion per window to be earned by frame divison on transfer price of 220 = transfer price - total variable cost incurred

= 220-140 = 80

profit / loss of glass divsion per window = sales price - total cost incurred (including glass @ 220 fromframe division)

=328 - 148 - 220 = (40 )

Incremental contribution (loss) per window for company as a whole = contribution of frame divison + loss of glass division = 80+(40) = $40

total profit of company on accptance of special order = 40X 1200 = $48000

From the perspective of clear window company as a whole special order should be accpeted

2e

Contribtion per window to be earned by frame divison on transfer price of 220 = transfer price - total variable cost incurred

= 220-140 = 80

profit / loss of glass divsion per window = sales price - total cost incurred (including glass @ 220 fromframe division)

=328 - 148 - 220 = (40 )

Incremental contribution (loss) per window for company as a whole = contribution of frame divison + loss of glass division = 80+(40) = $32

total profit of company on accptance of special order =40X 1200 = $48000

An autonomous glass division manage rwill reject the special order, since its total loss on acceptance of special order would be 40X1200 = 48000