Fenster Corporation manufactures windows with wood and metal frames. Fenster has three departments: glass, wood, and metal. The glass department makes the window glass and sends it to either the wood or metal department where the glass is framed. The window is then sold. Upper management sets the production schedules for the three departments and evaluates them on output quantity, cost variances, and product quality. 1\. Are the three departments cost centers, revenue centers, or profit centers? 2\. Are the three departments centralized or decentralized? 3\. Can a centralized department be a profit center? Why or why not? 4\. Suppose the upper management of Fenster Corporation decides to let the three departments set their own production schedules, buy and sell products in the external market, and have the wood and metal departments negotiate with the glass department for the glass panes using a transfer price. a. Will this change your answers to requirements 1 and \(2 ?\) b. How would you recommend upper management evaluate the three departments if this change is made?
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Ballantine Corp. produces and sells lead crystal glassware. The firm consists of two divisions, Commercial and Specialty. The Commercial division manufactures 300,000 glasses per year. It incurs variable manufacturing costs of 8 dollar per unit and annual fixed manufacturing costs of 900,000 dollar. The Commercial division sells 100,000 units externally at a price of 12 dollar each, mostly to department stores. It transfers the remaining 200,000 units internally to the Specialty division, which modifies the units, adds an etched design, and sells them directly to consumers online. Ballantine Corp. has adopted a market-based transfer-pricing policy. For each glass it receives from the Commercial division, the Specialty division pays the weighted-average external price the Commercial division charges its customers outside the company. The current transfer price is accordingly set at 12 dollar. Eileen McCarthy, the manager of the Commercial division, receives an offer from Home Décor, a chain of upscale home furnishings stores. Home Décor offers to buy 20,000 glasses at a price of 9 dollar each, knowing that the entire lead crystal industry (including Ballantine Corp.) has excess capacity at this time. The variable manufacturing cost to the Commercial division for the units Home Décor is requesting is 8 dollar, and there are no additional costs associated with this offer. Accepting Home Décor's offer would not affect the current price of 12 dollar charged to existing external customers. 1\. Calculate the Commercial division's current annual level of profit (without the new order). 2\. Compute the change in the Commercial division's profit if it accepts Home Décor's offer. Will Eileen McCarthy accept this offer if her aim is to maximize the Commercial division's profit? 3\. Would the top management of Ballantine Corp. want the Commercial division to accept the offer? Compute the change in firm-wide profit associated with Home Décor's offer.
What is one potential limitation of full-cost-based transfer prices?
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