Reference no: EM132325685

Question

Clear Windows manufactures windows for the home building industry. The window frames are produced in the Frame Division at a variable production cost of $190 per unit. The frames are then transferred to the Glass Division, where glass and hardware are installed to make the windows. The Glass Division incurs a variable cost of $310 per unit in addition to the transfer price of the Frame Division. The fixed  production cost in each division is 30% of the variable production cost.

The Frame Division can also sell frames to custom home builders at a price of $250 per unit, but it will incur a selling expense of $5 per unit. The Glass Division sells its finished windows for $570 per unit.

Required:

(a) Assume that the Frame Division has spare capacity. Calculate the transfer price using the general rule.

(b) Assume that the Frame Division has no spare capacity. Calculate the transfer price using the general rule.

(c) Assume that the Frame Division has spare capacity. Calculate the transfer price if it is based on absorption cost plus a 10% markup. Would the manager of the Glass Division accept this transfer price?

(d) Assume that the Frame Division has limited spare capacity and can only supply half of the required 200 frames to the Glass Division. To supply all of the 200 units to the Glass Division, the Frame Division would have to forgo production and sales of 140 units of another product to external customers. These external sales typically yield a contribution of $110 per unit. Use the general rule to calculate the transfer price.

(e) Assume that the Frame Division has spare capacity, and the transfer price is based on variable production cost plus a 20% markup. The  Glass Division has been approached by a construction company with a special order for 1,000 windows at $520 each. Is this offer in the best interests of the organisation as a whole? Would an autonomous Glass Division manager accept the special offer? Does this transfer price achieve goal congruence?