SolarFrame is a manufacturing company which manufactures windows for both residential houses
and commercial buildings. It has two divisions each operates as a profit centre. The first division
(called the glass production division) produces glass panels and the second division (called the frame
production division) produces the external frame and assembles the final product.
The glass production division sells to external customers but the majority of its produced units are
sold to the frame production division. The market price which the glass production division charges
to external customers is used for internal transactions between the two divisions. The production
and sales plans for each division for the year 2022 are summarised in the table below:
Frame production division
Glass production division
Selling price per unit to external customers
£1,200
£300
Selling price per unit to other divisions
£300
Units sold to external customers
500
100
Units sold to other divisions
400
Units bought from other divisions
400
Variable costs per unit:
£125
(1) Glass bought from other divisions/externally
£300
(2) Other parts costs
£200-
(3) Other variable costs
£150
Fixed costs
Requirements:
£100,000
£65,000
1) Prepare a detailed profitability statement which shows the yearly profit of each division and the
whole company. Break down revenues and costs figures into those external and interdivisional as
appropriate.
2) In May 2022, the frame production division was approached by a new supplier who was willing to
supply 100 units of glass panels at £280 per unit. However, accepting this offer means that the glass
production division will have to reduce its planned level of production (i.e. 500 units) by this same
amount (i.e. 100 units). The manager of the frame production division intends to accept the offer.
However, the manager of the glass production division intends to warn the headquarter that the
profitability of his division and that of the whole company will decrease if the new offer is accepted.
Prepare a detailed profitability statement similar to the one you prepared in 1 above to show the
profitability impact of the decision to accept the new offer on the whole company and each of its
divisions. Will the acceptance of the new offer be in line with the financial interest of the whole
company?
3) An ideal transfer price can be characterised by (1) encouraging division managers to make optimal
decisions for the whole organisation and (2) motivating the buying divisions to acquire and use
resources efficiently. Evaluate the extent to which the market price (£300) used between the two
divisions meets these two characteristics. Support your answer with evidence/information from the
case company. Can you reframe this question by putting all the production and sales plan in a table ???
