ANSWER THE FOLLOWING

Assume that there is spare capacity in the Frame Division.

i. Use the general rule to calculate the transfer price for one unit of window frame.

ii. Suppose that the predetermined fixed overhead rate in the Frame Division is 125% of direct labour cost. Calculate the transfer price for one unit of window frame if it is based on standard absorption cost plus a 10% markup.

iii. Assume that the Frame Division has limited capacity and can only supply half of the required 200 units of the window frame to the Glass Division. To supply all of the 200 units, the Frame Division would have to stop the production and sales of 150 units of window frame to external customers. These external sales typically generate a contribution of $240 per unit. Use the general rule to calculate transfer price for one unit of window frame and explain the likely decision that the two divisions will make about the transfer price.

Summer Limited specialises in manufacturing windows for the home building industry. The company's Frame Division is responsible for producing the window frames which are then transferred to the Glass Division for installation of double paned glass and hardware components. The company's best-selling product is the double paned window. The standard unit cost of this window is as follows: - $180 excluding transfer price from the Frame Division. he Frame Division can also sell frames directly to external customers at $480 per unit. he Glass Division sells its finished windows for $1,140 per unit