MAF 551 MANAGEMENT ACCOUNTING AND CONTROL

SEMESTER 2 SESI 2023/2024

TUTORIAL 6: TRANSFER PRICE

QUESTION 1 [MAF551 / JAN 2024]

Seteguh Maju Bhd is a manufacturer and supplier of motorcar parts and equipment. The Spare
Parts Department is one of its profit centers that produce spare parts and supply the product to fulfill
both internal and external demand. Meanwhile, the Equipment Department uses spare parts to
produce special equipment for external customers. The Spare Parts Department currently transfers
to the Equipment Department 5,250 units spare parts at variable costs plus 20% markup and 25,200
units to external customer at RM150 each. The spare Parts Department operates at full capacity.

The Equipment Department charges its customers RM200 for each spare part unit sold and installed
in the customer’s vehicles. The other variable production costs incurred are RM33, and the fixed
cost of the Equipment Department is RM170,000 per annum. The Equipment Department expects
their sales to remain at 5,250 units for the coming year.

Recently, a customer of the Spare Parts Department has offered to purchase the spare parts at
RM150 per unit. The Spare Parts Department manager is interested in supplying the units
requested by the customer as it appears to be more profitable. However, he was a bit skeptical that
the top management of Seteguh Maju Bhd would approve his action.

The summarised current annual income statement of the Spare Parts Department is provided
below:

Sales to Equipment Sales to external

Department (RM) customers (RM)
Sales:
5,250 units at RM96 504,000
25,200 units at RM150 3,780,000
Less: Variable costs (420,000) (2,016,000)
Contribution margin: 84,000 1,764,000
Less: Fixed costs (70,000) (170,000)
Net Income 14,000 1,594,000

Required:

a. Calculate the profit of each division and the company if the transfer price is based on the
variable cost plus 20% markup. (Show Income Statement and relevant computations)
(8 marks)

b. i) Evaluate the effect on the profit of each division and the company if the external
market price is used as a basis of transfer pricing.
(Show Income Statement and relevant computations).
(10 marks)

ii) Recommend the best transfer price that would be acceptable for both managers in
each department. (Show relevant computations and explain your computations)
(7 marks)
(Total: 25 marks)
QUESTION 2 [MAF551 / JUL 2023]

Cottony Sdn Bhd (CSB) is a textile company with two divisions, Yarn Division and Fabric Division.
Yarn Division is a reputable and reliable manufacturer of high-quality yarns for the textile and
garment industries. On the other hand, the Fabric Division specializes in producing and trading
fabrics. One crucial material needed in fabric production of Fabric Division is the yarn produced by
Yarn Division. Fabric Division focuses on the research and development and production of ready
stocks fabric and has passed the ISO system and the European OEKO-TEX certification. Fabric
Division sells its fabric to clothing manufacturers in Asian countries.

Yarn Division currently operates at 100% capacity, producing about 5,000 tons of yarns annually.
Currently, the Yarn Division sells 90% of its yarn to satisfy the demand from the external market at
the price of RM1,200 per ton. The balance will be transferred to Fabric Division at the marginal cost
plus 25%. Total variable costs amounted to RM650 per ton, inclusive of the variable selling cost of
10% of the market price. The company will not incur variable selling costs for the divisional transfer.
The fixed cost remains constant at RM144 per ton.

The Fabric Division produces 3,000 fabric rolls (each containing 1,200 meters) per annum which is
equivalent to 80% of its capacity. One roll of fabric requires the use of 0.3 tons of yarn. Any
deficiency in the yarn will be bought from the external supplier, Yarn-Up Sdn Bhd, at the cost of
RM950 per ton. The fabrics produced are sold to garment manufacturers in Asian countries at
RM3,600 per roll. Its variable cost (excluding the yarn) is approximately RM970 per roll, while the
fixed cost is RM290 per roll.

Required: (round up to the transfer price to the nearest whole number)

a. Using the contribution margin format, prepare the profit statement for each division and
Cottony Sdn Bhd as a whole under the current condition.
(8 marks)

b. Post Covid-19 has somehow brought in many new orders to the Fabric Division. Demand has
increased rapidly that has forced it to operate at its full capacity. The increase in production
requires the use of more yarn. Unfortunately, yarn is now in limited supply. Procurement
Manager of Fabric Division has come up with two possible alternatives:

Alternative 1
The external supplier, Yarn-Up Sdn Bhd, can only supply the yarn if Fabric Division would
enter into an agreement to buy all its 1,000 tons annually from them. The balance of yarn
needed would be supplied by the Yarn Division, forcing the Yarn Division to operate under its
full capacity. No other suppliers can fulfil the Fabric Division’s yarn requirement.

Alternative 2
Since they are both the subsidiary of Cottony Sdn Bhd, Fabric Division has proposed that the
Yarn Division should supply all the required yarn at the full cost plus 8.3% mark-up. As Yarn
Division is already operating at its full capacity, any insufficient amount would be sacrificed
from its normal sales.
i. Calculate the net profit for each division and the parent company under both
alternatives. (using the contribution margin format)
(10 marks)
ii. Which alternative should be chosen? Give your reasons.
(7 marks)
(Total: 25 marks)
QUESTION 3 [MAF551 / FEB 2023]

EcoGreen Living (EGL) Bhd. is the first company to design and produce accordion paper
furniture in Malaysia and has won several awards in the International Furniture Festival many
times. The company owns professional equipment and honeycomb patents in domestic and
overseas markets and has made great achievements in the paper furniture industry.

The company has various divisions including the Paper division and Furniture division. The
Paper Division produces at full capacity amounting to 60,000 kg of high-quality Kraft paper.
50% of the production will be transferred to the furniture division. The remainder will be sold to
external market at RM60 per kg. It is the company policy to set transfer price at market price.

Meanwhile, the Furniture division is also producing paper furniture. This paper furniture is
furniture made of Kraft paper. Each unit of furniture requires 6 kg of Kraft paper. The design
applies a unique honeycomb structure with a strong bearing capacity up to 300 kg. It can also
be extended, shaped freely and folded like a small book. The furniture division produces and
sells paper furniture on the market for RM432 per unit.

The following is the standard cost for both divisions:

EcoGreen Living (EGL) Bhd

Standard Cost for the year ended December 2022

Paoer Division Furniture Division

RM RM
Direct material 10 20
Direct labour 10 30
Manufacturing overhead 15 20
Selling overhead 5 35

Additional information:

1. The manufacturing overhead in the Paper Division and Furniture Division consists of
25% fixed cost.

2. The selling division will not bear the cost of transferring the Kraft paper internally to
encourage the Paper Division to continue supporting the transfer in the coming periods.

3. Administrative overheads in the Paper Division and Furniture Division are fixed costs
amounting to RM300,500 and RM120,000 respectively.

Required:

a) Ryan Sam, manager of the Paper Division, believes that the transfer price to the
Furniture Division should be at market price. Prepare the profit statement of each
division and EcoGreen Living (EGL) Bhd for the year ended December 2022 by showing
the contribution margin clearly.
(8 marks)
b) The manager of the Furniture Division, Mr Kayla, is not happy with the existing
policy regarding the internal transfer price. He requested the Paper division to
transfer the Kraft paper at 20% of the variable cost. Evaluate the performance of
each division and the company as a whole by preparing a revised profit statement.
(Use the contribution margin format)
(10 marks)

c) Recently, customers have become aware of the importance of caring for nature
and want to live in an eco-friendly house. This has increased the demand for paper
furniture. Therefore, the Furniture Division's management has suggested
increasing furniture production by 60%. Using the general pricing rule, advise the
price range for the internal transfer to meet the increased demand.
(7 marks)
(Total: 25 marks)

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QUEATION 4 [MAF551 / JUL 2022]

The Pacific Company is a multi-divisional company that produce electrical products that is
distributed throughout Malaysia. It has two main divisions, Division A and Division B. Division
A produces a sub-assembly part of an electronic device, AA-R which is used in the
manufacturing of the electrical products. At the same time, Division B is also currently using
this sub-assembly part for its final product. There is a high demand for AA-R from the external
market. Pacific Company divisional managers have full responsibility for profits and complete
autonomy to accept or reject transfers from other divisions.

Currently, Division A is operating at full capacity. Due to the competitive demand for AA-R, the
Divisional Manager of Division A has decided to transfer only 100,000 units of AA-R to Division
B. This represents 40 percent of Division A total productions and sales. Each unit of AA-R is
used in each final product of Division B. Division A charges Division B at market price for the
part, which is RM700 per unit.

Division B on the other hand, sells its final product at RM1,200 per unit to the outside
customers. The manager of Division B feels that Division A should transfer the part at a lower
price than the market price, because at this price Division B is unable to make a profit. On top
of that, divisional manager of Division B also requested from Division A manager to increase
the unit transferred to his department by 50 percent from the current unit transferred.

Pacific Company requested for Division A to transfer AA-R at variable cost plus 10%. The
manager of Division A is not happy with the suggestion and the direct intervention from Pacific
Company and this has forced him to evaluate the suggestion.

The following are the detailed cost for both divisions:

Division A Division B
RM RM
Transfer price - 700
Direct material 250 120
Direct labour 140 180
Production overhead 75 150
Direct expenses 90 200

Variable production overhead costs are 2/3 of the total production overhead and are applicable
for both divisions.

Required:

a. Compute the contribution margin for each division and Pacific Company if the transfer
price is at market price. (Show an extract income statement)
(8 marks)

b. i. Evaluate the impact on the profitability of each division and the company if the
request from Division B is fulfilled using the transfer price suggested by Pacific
company using the contribution margin approach. (Show an extract income
statement)
(10 marks)

ii. Antartic Company has approached the divisional manager of Division B to supply
the units required, a product like component AA-R at a price of RM555. If this

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suggestion is accepted Division A will be able to fulfil the existing demand from its
external market.

Advise the manager of Division B whether to buy component AA-R from the new
supplier or to buy from Division A at the current market price. The decision made
must be in the best interest of the company.
(7 marks)
(Total: 25 marks)

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QUESTION 5 [MAF551 / DEC 2018]

Lasko Berhad manufactures cooling electric fan for use in the residential and commercial
building industry. The company has several autonomous divisions which include Motor
Division and Fan Division.

Motor Division produces cooling motors and sells it to external market as well as to Fan
Division. Cooling motors produced by Motor Division are highly demanded due to its stable
speed at maximum efficiency as well as reasonable price. It is policy of Lasko Berhad to
transfer half of cooling motor produce by Motor Division to Fan Division at variable costs plus
10% and the balance is sold to the external market at RM300 per unit. Currently Motor Division
produces 20,000 units cooling motor per annum at its full capacity.

Below is the cost structure for each unit of cooling motor:

Per unit
RM
Direct Materials 30
Direct Labour 40
Production overhead (30% fixed) 60
Fixed Administrative expenses 20
Variable selling & distribution 10

Fan Division produces electrical cooling fan and sell it to external market at RM600 per unit.
One unit fan requires one unit cooling motor. There is no variable selling & distribution cost
incurred for any internal transfer of cooling motor to encourage internal sales within Lasko
Berhad. Currently the division is producing at 80% capacity levels. Below is the cost structure
per unit of cooling fan:
Per unit
RM
Direct Materials (included motor from Motor Divison) 270
Direct Labour 36
Production overhead (60% fixed) 80
Fixed Administrative expenses 25
Variable selling & distribution 15

Required:
a. Explain four (4) benefits of operating the transfer pricing system within a decentralised
organisation. (8 marks)

b. i. Based on current policy, evaluate the performance of each division and the company
as a whole. (Show Income Statement) (10 marks)

ii. Mr Zaki, a manager of Fan Division is planning to increase the production of his division
at full capacity. Therefore after conducting a market survey regarding demand for the
products at external market, he has decided to implement the above planning.
However Fan Division need to negotiate with Motor Division to supply extra cooling
motors to them.
Advise Motor Division whether to agree on the above negotiation for the benefits of
Lasko Berhad. (Support your answer with calculations and show Income Statement)
(7 marks)
(Total: 25 marks)