Question 4 10 marks Crystal Limited manufactures photo frame

Question 4 (10 marks)
Crystal Limited manufactures photo frames. The photo frames are assembled
in the Frame Division. The half-finished frames are then transferred to the
Finishing Division, where the glass and other components are installed. The
the standard cost for the company’s A4 side frame is detailed as follows:

The frame division can also sell half-finished frames to photo framing
companies which install the glass and other components. The sales price of a
half-finished frame is $24.00. The Finishing Division sells finished frames for
$57.00.
Required:
(a) Assume that there is no spare capacity in the Frame Division, use the
general transfer pricing rule to calculate the transfer price for half finished frames. (2 marks)
(b) Assume that there is spare capacity in the Frame Division.
i. Use the general transfer pricing rule to calculate the transfer price
for half-finished frames. (2 marks)
ii. Assume that the predetermined fixed overhead rate in the division
is 135 percent of direct labor cost, calculate the transfer price for
half-finished frames based on standard absorption cost plus 10
percent markup. (2 marks)
(c) Discuss the cost and benefits of decentralization. (4 marks)

Solution

Answer of (a). Cost to be incurred in manufacturing half finished frames : 19.50
Contribution to be lost due to transfer ($24 - $19.5) : 4.50
Transfer price that should be charged in case if there is   
no spare capacity : 24.00

Answer of (b)(i). Variable cost incurred in manufacturing of half finished
frames : 19.50
Benefit to be lost (as there is spare capacity) : 0.00
Minimum Transfer Price : 19.50

Answer of (b)(ii). Variable cost incurred in manufacturing of half finished
frames : 19.50
Add: Fixed Overhead incurred (135% of $6.00) : 8.10
Total Cost : 27.60
Add: Mark up (10% of $27.6) : 2.76
Tansfer Price for half furnished frames : 30.36

Answer (c). Cost of Decentralization: The cost of activites which are common to all divisions, may be greater for decentralized structure than centralized structure. It may be reesult in duplication of staff activities. Decentralization increases costs and reduces quality for two reasons: reduced specialization and fragmentation.

Benefit of Decentralization: The decentralized structure of outsourcing can provide an organization both economic & non-economic benefits. Other benefits of decentralization are: