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 $175. The Glass Division sells its finished windows for $510. 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		$	43				$	67	*
Direct labor			40					43
Variable overhead			67					67
Total		$	150				$	177

*Not including the transfer price for the frame.

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

Required:

2-d. The Glass Division has been approached by the U.S. Army with a special order for 2,300 windows at $352. Assume the transfer price established in requirement 2-c. above is being used (which is $220).

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 2,300 windows at $352. Assume the transfer price established in requirement 2-c. above is being used (which is $220).

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

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

Answer 1

Contribution of Overall Contribution on Special Order By U.S. Army

	FRAME	GLASS	TOTAL
Selling Price	175	352
Transfer Price	220
	395	352
Transfer Price		-220
Variable Cost	-150	-177
Contribution	245	-45	200

Contribution of Overall Contribution If Glass Division sells in External Market

	FRAME	GLASS	TOTAL
Selling Price	175	510
Transfer Price	220
	395	510
Transfer Price		-220
Variable Cost	-150	-177
Contribution	245	113	358

Hence If the Glass Division makes external sales the Overall Contribution is $358 (i.e, 158 in excess).

i) Incremental contribution (loss) per window = $158 (358-200)

ii) Hence offer from U.S. Army should not br accepted

2(e)

i) Incremental loss [Calculated in 2(d)] is [113-(-45)] = 158 from Glass Division

ii) Autonomous Glass Division manager will  reject the special order, as it can easily sell in the external market at $510

Kindly give me a ?.It helps me. Thanks!!