Question

Clearview Window Company manufactures 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, doublepaned operable window.

The Frame Division also can sell frames directly to custom home builders, who install the glass and hardware. The sales price for a frame is $190. The Glass Division sells its finished windows for $430. 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		$	35				$	85	*
Direct labor			50					35
Variable overhead			85					70
Total		$	170				$	190

*Not including the transfer price for the frame.

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

2-c. 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.

2-d. The Glass Division has been approached by the U.S. Army with a special order for 1,500 windows at $380. Assume the transfer price established in requirement 2-c. above is being used.

i.What is the incremental contribution (loss) per window for Clearview Window Company as a whole if this special order is accepted?

ii.From the perspective of Clearview Window Company as a whole, should the special order be accepted or rejected?

2-e. The Glass Division has been approached by the U.S. Army with a special order for 1,500 windows at $380. Assume the transfer price established in requirement 2-c. above is being used.

i. What is the incremental contribution (loss) per window for the Glass Division if this special order is accepted?

ii.Will an autonomous Glass Division manager accept or reject the special order?

Answer 1

Solution

Clearview Window Company

2a. computation of transfer price for Window Frames assuming availability of excess capacity:

Transfer price = $170

Since, the Frame Division has excess capacity, the transfer price would be the total variable cost per window –

Direct materials           $35

Direct labor                 $50

Variable overhead       $85

Total                            $170

2c. transfer price based on standard full cost plus a 10% markup –

direct material	$35
direct labor	$50
variable overhead	$85
Fixed overhead at 120% of direct labor cost	$60
Total cost	$230
markup at 10%	$23
Transfer price	$253

2d. special order 1,500 windows at $380 per window –

1. Incremental contribution (loss) per window for the company as a whole if the special order is accepted:

Using the transfer price established on 2c above, $253,

Incremental revenue per window		$380
Transfer price	$253
direct material	$85
direct labor	$35
variable overhead	$70
Total cost		$443
Incremental loss		($63)

1. From the perspective of the company as whole, the special order should be REJECTED.

Explanation: since the special order for 1,000 windows at $380 each results in an incremental loss of $63 (based on the transfer price of $253), the order is not profitable to the company as a whole and should be rejected.

2e. using transfer price $253 for evaluation of special order –

1. Incremental contribution (loss) per window to the Glass Division:

Incremental revenue per window		$380
Transfer price	$253
direct material	$85
direct labor	$35
variable overhead	$70
Total cost		$443
Incremental loss		($63)

1. An autonomous Glass Division manager REJECTS the special order.

Explanation: the offer price of $380 does not fully cover all the direct costs including the transfer price for the Glass Division. Hence, the result is a negative contribution margin and so the Glass Division manager rejects the special order.