Question

Required information [The following information applies to the questions displayed below.) 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 $480. The markets for both frames and finished windows exhibit perfect competition. The standard variable cost of the window is detailed as follows: Glass Division $ 58* Frame Division $ 40 32 58 $ 130 Direct material Direct labor Variable overhead Total 40 58 $156 "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 2,000 windows at $331. 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 2,000 windows at $331. 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

CALCULATION OF TRANSFER Price (FULL Cost + MARK UP) PARTICULARS AMOUNT C$) VARIABLE COST 130 40 Fixed OVERHEAD TOTAL COST 110 (+) MARK UP @ 10% TRANSFER PRICE (from FRAME Division D GLASS DIVISIOy) andy COMPUTATION OF OVERALL CONTRIBUTION ON SPECIAL OREDR By U.S ARMY ; FRAME GLASS TOTAL 506 331 PARTICULARS SELLING Pesce lorrer TRANSFER PRICE 115 187 187 693 362 331 TRANSFER PRICE (181) (187) VARIABLE COST (130) (156) (286) CONTRIBUTION 232 (12) 220

COMPUTAION OF OVERAU CONTRIBUTION OF GLASS Division Sells Tv EXTERNAL MARKET: FRAME GLASS TOTAL PARTICULARS SELLING PRICE TRANSFER PRICE 175 480 655 187 187 362 480 842 (181) TRANSFER PRICE VARIABLE Cost (187) (286) (130) (156) CONTRIBUTION 232 137 369 Hence IF THE GLASS DIVISION MAKES EXTERNAL SALES, OVERALL CONTRIBUTION JS $369. IF THE US ARMY OFFER IS ACCEPTED THERE IS INCREMENTAL LOSS OF ($220-$369) - $149. HENCE OFFER FROM US ARMY SHOULD NOT BE ACCEPTED. 2.e? ;INCREMENTAL loss (from Calculation made in 2.d). is ($137 - ($-12)) = $149. from GLASS DIVISION i) AUTONOMOUS GLASS DIVISION WILL REJEC1 The Offee, AS IT CAN EASILY SELL AT $480 IN THE EXTERNAL MARKET.

ANSWER TO THE Question :- 2-a) Excess CAPACITY INDICATES THAT THERE EXISTS IDLE CAPACITY WHICH DOES NOT HAVE ANY OPPORTUNITY COST. So THE TRANSFER PRICE IN THIS CASE WOULD BE VARIABLE COST OF FRAME DIVISION. Calculation of Variable Cost [FRAME DIVISION] Particulars Amount ($) DIRECT MATERIAL 40 DIRECT LA BOUR 32 VARIABLE OVERHEAD 58 130 .:. PRASFER PRICE = $130. 2-6) GENERALLY, TRANSFER PRICE DOES NOT INCLUDE fixed Cost. But SOMETIMES A COMPANY May SET THE TRANSFER PRICE AT FULL Cost + MARK UP (VARIABLE COST + fixed Cost + PROFIT). COMPUTATION OF foxed OverHEAD :- 125. OF DIRECT LABOUR Cost. 1.e. 32 + (32x25 7 32+ 8 $40.