Question 2: Performance Reporting and Transfer Pricing (18 marks] Clear Windows manufacture 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 Frame Division can also sell frames directly to custom home builders, who install the glass and hardware. The two divisions run as autonomously as possible, subject to the group's current policy that the Frame Division must make internal sales first before selling outside the group; and that the Glass Division must always buy its frames from the Frame Division. However, this company policy, together with the transfer price which the Frame Division charges the Glass Division, is currently under review. Details of the two divisions are given below. The Glass Division: The Glass Division's budget for the coming year shows that 35,000 frames will be needed. An external supplier could supply these to the Glass Division for $80 each. The Frame Division: Frame Division has the capacity to produce a total of 60,000 frames per year. Details of the Frame Division's budget, which has just been prepared for the forthcoming year, are as follows: Budgeted sales volume (units) 60,000 Selling price per unit for external sales of frames $85 Variable costs per unit for external sales of frames $77 The variable cost for sales to the Glass Division of frames would be $3 per unit less compared to external sales due to cost savings on distribution and packaging. Maximum external demand for the frames is 30,000 units per year. Required: Question 2.1 Assuming that the group's current policy could be changed, advice, using suitable calculations, the number of frames which the Frame Division should supply to the Glass Division in order to maximise group profits. Recommend the transfer price or prices at which these internal sales should take place after considering the perspective of the two divisions and the perspective of the group. (8 marks) Your Answer (expand the space as required): Question 2.2 Explain why it may not be desirable for head office management to dictate transfer prices. When should head office management intervene in the transfer pricing process? [Word limit: 150 words. Note the word count at the end of your answer] (4 marks) Your Answer (expand the space as required): Question 2.3 Contracting out or service outsourcing is expected to improve cost-effectiveness and quality, and it has thus become a frequent occurrence within public and private organizations over the recent years. Is service outsourcing a form of decentralisation? Why are there so many concerns about service outsourcing and are these concerns justified? [Word limit: 300 words. Note the word count at the end of your answer] (6 marks) Your Answer (expand the space as required): Word count: Question 2: Performance Reporting and Transfer Pricing (18 marks] Clear Windows manufacture 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 Frame Division can also sell frames directly to custom home builders, who install the glass and hardware. The two divisions run as autonomously as possible, subject to the group's current policy that the Frame Division must make internal sales first before selling outside the group; and that the Glass Division must always buy its frames from the Frame Division. However, this company policy, together with the transfer price which the Frame Division charges the Glass Division, is currently under review. Details of the two divisions are given below. The Glass Division: The Glass Division's budget for the coming year shows that 35,000 frames will be needed. An external supplier could supply these to the Glass Division for $80 each. The Frame Division: Frame Division has the capacity to produce a total of 60,000 frames per year. Details of the Frame Division's budget, which has just been prepared for the forthcoming year, are as follows: Budgeted sales volume (units) 60,000 Selling price per unit for external sales of frames $85 Variable costs per unit for external sales of frames $77 The variable cost for sales to the Glass Division of frames would be $3 per unit less compared to external sales due to cost savings on distribution and packaging. Maximum external demand for the frames is 30,000 units per year. Required: Question 2.1 Assuming that the group's current policy could be changed, advice, using suitable calculations, the number of frames which the Frame Division should supply to the Glass Division in order to maximise group profits. Recommend the transfer price or prices at which these internal sales should take place after considering the perspective of the two divisions and the perspective of the group. (8 marks) Your Answer (expand the space as required): Question 2.2 Explain why it may not be desirable for head office management to dictate transfer prices. When should head office management intervene in the transfer pricing process? [Word limit: 150 words. Note the word count at the end of your answer] (4 marks) Your Answer (expand the space as required): Question 2.3 Contracting out or service outsourcing is expected to improve cost-effectiveness and quality, and it has thus become a frequent occurrence within public and private organizations over the recent years. Is service outsourcing a form of decentralisation? Why are there so many concerns about service outsourcing and are these concerns justified? [Word limit: 300 words. Note the word count at the end of your answer] (6 marks) Your Answer (expand the space as required): Word count