The Glass Division of a Company Makes Glass Vases, Which

Essay

The Glass Division of a company makes glass vases, which have the following unit costs: $$\begin{array} { l r } \text { Direct materials } & \$ 0.20 \\\text { Direct labour } & 0.35 \\\text { Variable overhead } & 0.15 \\\text { Fixed overhead } & 1.30 \\\text { Selling commission } & 0.50\end{array}$$ The Florist Division of the company sells cut flowers and uses the glass vases. The Florist Division uses 10,000 vases per year and currently buys them from an outside supplier for $4 each. The Glass Division produces and sells 100,000 glass vases per year and sells them on the outside market for $4 each. Vases sold outside incur the sales commission; this commission would not be paid on internal transfers. The Glass Division and the Florist Division managers just met and agreed on a transfer price of $3.75 per vase. Is this a good idea for each division? Explain.