ACN3212_Exercises for FE
QUESTION 1 (25 MARKS)
(a)
Explain how negotiation between the supplying and buying divisions may be used
to set transfer prices.
(b)
Max Sdn Bhd manufactures heating and air conditioning units in its four divisions.
One division, the Component Division produces electronic components that can be
used by all the other three divisions. All of the components produced by this division
can be sold to outside customer. However from the beginning about 70% of its output
has been used internally. The current policy requires that all internal transfers of
components be transferred at full cost.
Recently, Azam Abdullah, the new chief executive of Max Sdn Bhd, decided to
review the transfer pricing policy. He was concerned that the current method of
pricing internal transfers might force decisions by divisional managers that would
be suboptimal for the firm. As part of his inquiry, he gathered some information
concerning Part3CM, used by the Small AC Division in its production of a window
air conditioner, Model 5AC.
The Small AC Division sells 10,000 units of Model 5AC each year at a unit price of
RM58. Given current market conditions, this is the maximum price that the division
can charge for Model 5AC. The cost of manufacturing the air conditioner is computed
as follows:
Part3CM
RM6.45
Direct materials
23.00
Direct labour
15.00
Variable overhead
3.50
Fixed overhead
6.50
Total unit cost
RM54.45
The window unit is produced efficiently and no further reduction in manufacturing
cost is possible. The manager of the Components Division indicated that she could
sell 10,000 units of Part 3CM to outside buyers at RM12 per unit. The Small AC
Division could also buy the part for RM12 from external suppliers. She supplied the
following details on the manufacturing cost of the component:
Direct materials
RM2.75
Direct labour
0.80
Variable overhead
1.10
Fixed overhead
1.80
Total unit cost
RM6.45
Required:
(i)
Compute the contribution margin earned by each division. Compute also the firmwide contribution margin associated with Part3CM and Model 5AC.
(ii)
Suppose that the CEO abolishes the current transfer policy and gives divisions
autonomy in setting transfer prices. What
transfer price would the manager of
Component Division set? Determine the minimum and the maximum transfer price.
(iii)
How would the new transfer pricing policy affect the production decision for Model
5AC of the Small AC Division?
(iv)
Given the new transfer price set by the Components Division and your answer to
(iii), how many units of 3CM will be sold externally?
QUESTION 2 (25 MARKS)
Alakat Sdn. Bhd, is working at full capacity producing 20,000 units of a unique product.
Manufacturing costs per unit for the product are as follows:
Direct materials
RM9
Direct labour
8
Manufacturing overhead
10
Total manufacturing costs per unit
RM27
The per unit manufacturing overhead cost is based on a RM4 variable cost per unit and
RM120,000 fixed costs. The non-manufacturing costs, all variable, are RM8 per unit, and
the sales price is RM45 per unit.
Ready Sdn. Bhd. has asked Alakat to produce 5,000 units of a modification of the new
product. This modification would require the same manufacturing processes. However,
because of the new nature of the proposed sale, the estimated non-manufacturing costs
per unit are only RM4 (not RM8). Alakat would sell the modified product to Ready Sdn.
Bhd. for RM35 per unit.
Required:
(a)
What is the effect on profit of Alakat if the special order is accepted?
(b)
If there is no excess capacity, what is the minimum price that Alakat should accept
for the special order?
(c)
If there is excess capacity, what is the minimum price that Alakat should accept for
the special order?
(d)
Explain two (2) limitations of relevant costs analysis.
QUESTION 3 (25 MARKS)
(a)
Distinguish between a cost centre, a profit centre and an investment centre.
(b)
Explain one (1) benefit and one (1) disadvantage of decentralisation.
(c)
Describe two (2) advantages and two (2) limitations of return of investment (ROI) as
a performance measure.
(d)
Tescon Group, has two regional divisions with headquarters in Johor Baharu and
Kuala Lumpur. The division in Kuala Lumpur is larger than Johor Baharu. Followings
are selected data on the two divisions:
Division
Sales (RM)
Net operating income (RM)
Average operating assets (RM)
Johor Bharu
Kuala Lumpur
3,000,000
9,000,000
290,000
720,000
1,300,000
4,000,000
Required:
(i)
For each division, compute the return on investment (ROI) in terms of profit
margin and asset turnover (compute to three decimal point).
(ii)
Assume that the company evaluates performance using residual income and that
the minimum required rate of return for any division is 15%. Compute the residual
income for each division.
(iii)
Is Kuala Lumpur's greater amount of residual income an indication that it is better
managed? Explain.
QUESTION 4 (25 MARKS)
(a)
The economic model of pricing has several limitations. Describe two (2) of its
limitations.
(b)
Explain what is meant by predatory pricing and resale price maintenance.
(c)
Describe two (2) pricing strategies for new products and provide one (1) example of
each.
(d)
Alia owns Yummie Cake which manufactures and sells cakes to retailers in Serdang
area. It only sells one type of cake but has plans to diversify its products if its loan
from SME Bank is approved. Currently, the full cost of one cake is RM15, of which
10% is fixed and 90% is variable. It has excess capacity that will enable Alia to cater
to individual and / or group orders.
(i) If Alia sells 10,000 units at the price of RM30 per unit, what is the pricing approach
adopted by Alia?
(ii) Alia received customers’ feedbacks that the price of Alia’s cake of RM30 is
higher than that of the competitor of RM28. If Alia decides to change its price to
RM28, how much cost should Alia incur in order to maintain the existing profits?