Clear view Window Company manufactures windows for the home-building industry. 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, double paned 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 $80. The Glass Division sells its finished windows for $190. The markets for both frames and finished windows exhibit perfect competition.

The standard variable cost of the window is detailed as follows:

Required:

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

a. Use the general rule to compute the transfer price for window frames.

b. Calculate the transfer price if it is based on standard variable cost with a 10 percent markup.

2. Assume that there is excess capacity in the Frame Division.

a. Use the general rule to compute the transfer price for window frames.

b. Explain why your answers to requirements (1a) and (2a) differ.

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.

d. Assume the transfer price established in requirement (2c) is used. The Glass Division has been approached by the U.S. Army with a special order for 1,000 windows at $155. From the perspective of Clear view Window Company as a whole, should the special order be accepted or rejected? Why?

e. Assume the same facts as in requirement (2d). Will an autonomous Glass Division manager accept or reject the special order? Why?

f. Comment on any ethical issues you see in the questions raised in requirements (2d) and (2e).

3. Comment on the use of full cost as the basis for setting transfer prices.

Transcribed Image Text:

Frame Division Glass Division Direct material $30* $15 20 Direct abor 15 30 Variable overhead 30 Total $65. ....... .......... $75 *Not including the transfer price for the frame.