Reference no: EM133050036
Clearview Ltd 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 to make the finished window. While the Frame Division can sell frames directly to external home builders, it would also incur an additional selling cost of $10 per frame. The market price for a frame is $550 and for a finished window is $1200.
The standard cost of a window is as follows:
|
Frame Division
|
Glass Division
|
|
Direct material
|
$ 70
|
$ 160
|
|
Direct labour
|
$ 110
|
$ 90
|
|
Variable overhead
|
$ 150
|
$ 180
|
|
Fixed overhead
|
$ 120
|
$ 120
|
The direct material cost of the Glass Division in the table above does not include the transfer price for the frame.
Required:
(a) Assume that the Frame Division has spare capacity. Calculate the transfer price using the general rule. Show workings.
(b) Assume that the Frame Division has no spare capacity. Calculate the transfer price using the general rule. Show workings.
(c) Assume that the Frame Division has no spare capacity. Calculate the transfer price if it is based on standard absorption cost plus a 20% markup. Is it likely that the internal transfer will take place? Explain your answer from the perspective of each division.
(d) Assume that both divisions have spare capacity. The Glass Division has been approached by the management of a commercial construction company with a special order for 1000 windows at $960 each.
(i) From the perspective of Clearview Ltd as a whole, should the special order be accepted or rejected? Explain why.
(ii) Calculate the transfer price if it is based on absorption cost plus 30%. Would an autonomous Glass Division manager accept or reject the special order?
(iii) Assume that Clearview Ltd decides to accept the special order. Calculate the minimum and maximum transfer price acceptable by both divisional managers.