How would intercompany sales affect Division B

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Question - Zuhal Sdn BHd manufactures electronics. It consists of several divisions classified as investment centers for performance evaluation purposes. Division A desires to purchase materials from Division B at a price of RM85 per unit. Division B can produce 25,000 units at full capacity, and is currently operating at 90% capacity with a variable cost of RM80 per unit. Division B currently sells only to outside customers who pay RM115 per unit. Division A pays an outside company RM110 per unit. If purchased from Division B, B's variable costs per unit would be RM10 less because the division would save on marketing expenses for these internal transfers. Division A requires 10,000 units.

Required -

Should Division A purchase internally or externally? Explain. Show supporting calculation.

How would intercompany sales affect Division B (gain or loss)? Calculate the contribution margin for selling internal and external. 

What solution would be best for Zuhal Sdn Bhd, assuming Division B has the ability to operate at full capacity?

Reference no: EM133066961

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