Transfer Pricing From Horngrens cost accounting a managerial emphasis by Madhav V. Rajan Srikant M. Datar.

The Wooden Craft Inc. manufactures windows for the real estate 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 builders, who install the glass and hardware. The sales price for a frame is $2,100. The Glass Division sells its finished windows for $4,300. The markets for both frames and finished windows exhibit perfect competition. The standard cost of the frame in detailed are as follows: Frame Division Direct Material $ 300 Direct Labor 400 VOH 50 FOH 480 Total $ 1.780 Required: 1. Assume that there is no excess capacity in the Frame Division. a. What is the maximum and minimum transfer price for window frame? (3%) b. Calculate the transfer price if it is based on standard full cost plus a 10% markup. (2%) c. If the CEO of the Wooden Craft Inc. determines a transfer price based on requirement (1b) above, will the internal transfer occur? Explain! (2%) 2. Assume that there is excess capacity in the Frame Division. a. What is the maximum and minimum transfer price for window frame? (3%) b. Explain why your answer to requirements (la) and (2a) differ. (2%) c. Calculate the transfer price if it is based on standard variable cost with 10% markup. (2%) d. The manager of the Window Division is willing to buy frames from the Frame Division, probably with a more competitive price. The Frame Division able to accommodate the internal transfer with its excess capacity. Suppose that the bonus for each manager will be based on operating income inthe respective division. The CEO suggested that the transfer price should be determined. either by market price or by variable cost with 10% markup. Which method that will be chosen by each manager? Explain! (3%] e. Please provide your suggestion(s) to settle the potential dispute in requirement [2d] above. (3%} 3. Comment on the use of full cost as the basis for setting transfer prices. (5%]