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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 $200. The Glass Division sells its finished windows for $540. 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		$	46				$	76	*
Direct labor			48					46
Variable overhead			76					76
Total		$	170				$	198

*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 125 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 2,600 windows at $398. 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 2,600 windows at $398. 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

2a). When there is excess capacity, then the transfer price is based on relevant cost which is variable cost of $170. Hence transfer price must be $170

2c).Fixed overhead = 48*125% = 60
Total cost = 170+60 = $ 230
Transfer price = 230+10% = $253

2d). If new offer received at $398 for windows
Relevant cost if Transfer price is $253:
= 253+198 = $451
Contribution per unit = 398-451 = $ -53 (loss)
From the perspective of company the offer should be accepted because there is profit in frame division which will setoff the loss of glass division

2e). If new offer is rec. at $398
Transfer price is $253
Relevant cost to glass division = 253 +198 = $451
Contribution per unit = 398-451 = $ -53 (loss)
From the perspective of glass division offer should not be accepted because there is loss in glass division.

(I think there is some mistake in question , in 2d part there should be requirement of transfer price of $170 and not $253, but it is saying price calculated in 2c. If there is normal transfer price then there is contribution per unit of $30 per unit. But still question is solved as per given situation in question).