Reference no: EM132955659

Cahaya Berhad is one of the companies in Malaysia that implement decentralization. The company has two main divisions, that are Division A located in Selangor and Division B located in Perlis. Division A currently sells a condenser to manufacturers of cooling systems in local and overseas market for the price of RM520 per unit. The variable costs of the condenser amount to RM380, and demand for this product currently exceeds the division's ability to supply to the marketplace.

Cahaya Berhad is considering the condenser as one of its important component in enhancing the refrigeration system that would be produced by Division B. The expected selling price of the refrigeration system is RM1,285, the variable manufacturing costs is RM820 and the expected transfer price of the condenser is RM490.

The top management is anxious to introduce the new refrigeration system. However, it is not possible for Division B to find other suppliers of the condensers in the quality and quantity desired. The company uses responsibility accounting and Return on Investment (ROI) in measuring divisional performance, and awards bonuses to divisional management.

Required:

Problem a. How would Division A's divisional manager likely react to the decision to transfer condensers to Division B? Show computations to support your answer.

Problem b. How would Division B's divisional management likely react to the RM490 transfer price?

Problem c. Assume that a lower transfer price is desired. What parties should be involved in setting the new price?

Problem d. From a contribution margin perspective, advise the top management of Cahaya Berhad on the transfer of condensers from Division A to Division B. Does the company benefit more if Division A sells the condensers to external market, rather than transfers the condensers to Division B? Support your answer by showing relevant workings.