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 $200. The Glass Division sells its finished windows for $580. The markets for both frames and finished windows exhibit perfect competition. The standard variable cost of the window is detailed as follows: Frame Division $ 50 48 Direct material Direct labor Variable overhead Total Glass Division $ 62* 50 62 $174 62 $160 $174 *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 3,000 windows at $374. 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 3,000 windows at $374. 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

2A
PARTICULARS	AMOUNT
DIRECT MATERIALS	$        50.00
DIRECT LABOR	$        48.00
VARIABLE OVERHEAD	$        62.00
TOTAL VARIABLE COST	$     160.00
TRANSFER PRICE = TOTAL VARIABLE COST AS THEIR IS EXCESS CAPACITY = $160
2C
PARTICULARS	AMOUNT
DIRECT MATERIALS	$        50.00
DIRECT LABOR	$        48.00
VARIABLE OVERHEAD	$        62.00
TOTAL VARIABLE COST	$     160.00
FIXED OVERHEAD RATE	$        60.00
125% *48.00
TOTAL COST	$     220.00
MARKUP 10%	$        22.00
TRANSFER PRICE	$     242.00
2D
(i)
SALE PRICE		$ 374.00
LESS: VARIABLE COST
TRANSFER PRICE	$     242.00
DIRECT MATERIALS	$        62.00
DIRECT LABOR	$        50.00
VARIABLE OVERHEAD	$        62.00	$ 416.00
LOSS PER WINDOW		$ (42.00)

(ii)
SALE PRICE		$ 374.00
LESS: VARIABLE COST
TRANSFER PRICE (only variable cost of frame division as computed in 2A)	$     160.00
DIRECT MATERIALS	$        62.00
DIRECT LABOR	$        50.00
VARIABLE OVERHEAD	$        62.00	$ 334.00
CONTRIBUTION PER WINDOW		$    40.00
2E
(i)
SALE PRICE		$ 374.00
LESS: VARIABLE COST
TRANSFER PRICE	$     242.00
DIRECT MATERIALS	$        62.00
DIRECT LABOR	$        50.00
VARIABLE OVERHEAD	$        62.00	$ 416.00
LOSS PER WINDOW		$ (42.00)
(ii) HE WOULD REJECT THE ORDER AS THERE IS LOSS AT TRANSFER PRICE OF $242