Clearview Window Company manufactures windows for the home-building industry. Th

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 $180. The Glass Division sells its finished windows for $490. The markets for both frames and finished windows exhibit perfect competition.

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

*Not including the transfer price for the frame.

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 2,100 windows at $319. 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 2,100 windows at $319. 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?

Frame Division Glass Division Direct material $ 41 $ 49 * Direct labor 40 41 Variable overhead 49 49 Total $ 130 $ 139

Explanation / Answer

2-c:

2-d:

if the perspective is company as a whole, the transfer price with in the divisions are irrelevant and only variable costs are considered.

As the special order resulting in a contribution of 50 per unit, it should be accepted

2-e:

glass division manager will reject the offer, as it results in a loss for the division.

Cost item Amount Direct material 41 Direct labor 40 Variable overhead 49 Fixed overhead 50 [40*125%] Total cost 180 Markup 18 [180*10%] Transfer price 198

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