Question: Cost centers, profit centers, decentralization, transfer prices. 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?