Clear’s Custom Window division has been purchasing a certain window components f

Question

Clear’s Custom Window division has been purchasing a certain window components from Duwee, Cheatim & Hoe Company. However it was determined that it can use one of the frames from the Framing division. The Framing Division, which is operating at capacity, incurs an incremental manufacturing cost of $65 per frame. The picture Framing division can sell all its output to the outside market at a price of $100 per frame, after incurring a variable marketing and distribution cost of $8 per frame. If the Window division purchases frames from Duwee at a price of $100 per frame, it will incur a variable purchasing cost of $7 per frame. Clear View’s division managers can act autonomously to maximize their own division’s operating income.

What is the minimum transfer price at which the Frame manager would be willing to sell frames to the Window division?

What is the maximum transfer price at which the Window manager would be willing to purchase frames from the Framing Division?

Now suppose that the Framing Division can sell only 70% of its output capacity of 20,000 frames per month on the open market. Capacity cannot be reduced in the short run. The Windows Division can assemble and sell more than 20,000 windows per month.

What is the minimum transfer price at which the Framing manager would be willing to sell frames to the Windows Division?

From what point of view of Clear View’s management, how much of the Framing Divisions output should be transferred to the Window Division?

If Clear View mandates the Framing and Windows managers to “split the difference” on the minimum and maximum transfer prices they would be willing to negotiate over, what would be the resulting transfer price? Does this price achieve the outcome desired in requirement 3b?

Explanation / Answer

If it can sell ll its frames , then 1) The minimum transfer price at which the Frame manager will be willing to sell is maret price - variable marketing and selling cots = 100 - 8 = 92 2) The maximum transfer price at which Window manager will be willing to purchase is market purchase price - variable purchase cost = 100 - 7 = 93 3) If the framing departments works at 70% capacity then framing depatment's minimum selling price would be the incremental variable cost = 65 The unused capacity of 30% which is 20000 * 30% = 6000 frames should be transferred to window department buyer seller minimum 65 65 maximum 92 93 Difference 27 28 spliiting the difference of 28 between the 2 means $ 14 ( 28/2) hence the transfer price should be 65 + 14 = 79 by this transfer price both the departments will benefit The above is based on the assumption of 30% unused capacity

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