Question

Question 4
Crystal Limited manufactures photo frames. The photo frames are assembled
in the Frame Division. The half-finished frames are then transferred to the
Finishing Division, where the glass and other components are installed. The
the standard cost for the company’s A4 side frame is detailed as follows:

Frame Division	Finishing Division
Direct material	$4.50	$9.00 (exclude transfer)
Direct labor	6.00	4.50
Variable overhead	9.00	9.00
Total	19.50	22.50

The frame division can also sell half-finished frames to photo framing
companies which install the glass and other components. The sales price of a
half-finished frame is $24.00. The Finishing Division sells finished frames for
$57.00.
Required:
(a) Assume that there is no spare capacity in the Frame Division, use the
general transfer pricing rule to calculate the transfer price for half finished frames.
(b) Assume that there is spare capacity in the Frame Division.
i. Use the general transfer pricing rule to calculate the transfer price
for half-finished frames.
ii. Assume that the predetermined fixed overhead rate in the division
is 135 percent of direct labor cost, calculate the transfer price for
half-finished frames based on standard absorption cost plus 10
percent markup.
(c) Discuss the cost and benefits of decentralization.

Answer 1