Supreme Window Company manufactures windows for the home builders. 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 window. The following discussion pertains to this product. The markets for both frames and finished windows exhibit perfect competition. The Frame Division has the option of either transferring the frames to the Glass division internally or sell them in the external market directly to custom home builders (Such home builders are capable of sourcing and installing the glass and hardware themselves)
The following per unit budgeted costs of the Frame division and Glass division is available from the accounting system:
Frame Division Glass Division
Direct Material $40 $58
Direct Labor $32 $40
Variable overhead $58 $58
Fixed manufacturing overhead is being applied to both divisions as a function of Direct labor cost. Fixed manufacturing overhead = 125.00% of Direct labor cost.
A) Assume that there is excess capacity in the Frame division. Use the general transfer pricing rule to compute the ideal transfer price.
B) Assume that the Frame division can sell as many frames that it can manufacture directly to home builders for a selling price of $220 per frame. Compute the ideal transfer price using the general transfer price rule.
C) Assume that the company policy is to transfer frames at a transfer price equal to full cost plus 10.00% markup. Calculate the transfer price for a frame transferred to the Glass division from the frame division.
D) The glass division has been approached by a customer for a special order.
The special order quantity = 2,700 windows.
Special order price offered by the customer = $433 per window.
Assume that the transfer price established under part (c) is being used in the company and the frame division has excess capacity.
Will this special order be accepted by the glass division manager who is being evaluated as a profit center manager?
E) Is goal congruence being achieved by the decision taken by the Frame division manager in part (D) above? F) Assume that the company policy is to use transfer price established by the ideal transfer pricing rule. Will the goal congruence be achieved for the special order discussed in part (D)?