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

Note: The direct material cost given above for the Glass division excludes the transfer price paid to the Frame division.

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.

Required:

Part (A): Assume that there is excess capacity in the Frame division. Use the general transfer pricing rule to compute the ideal transfer price (2 points)

Part (B): Assume that the Frame division can sell as many frames that it can manufacture directly to home builders

for a selling price of

$175

per frame.

Compute the ideal transfer price using the general transfer price rule (2 points).

Part (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 (2 points)

Part (D): The glass division has been approached by a customer for a special order.

The special order quantity equals

2,000

windows.

Special order price offered by the customer equals

$331

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? Why or why not?

Justify your decision by computing the incremental profits from the special order from the perspective of Glass division manager

Part (E): Is goal congruence being achieved by the decision taken by the Frame division manager in part (D) above?

Justify your answer quantitatively

Part (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)? Justify with numerical calculations