QUESTION 1 (20 MARKS)

Maju Berhad is a large manufacturing company that produces electronics products and this company is operated with multiple divisions. There are two main divisions in this company that are evaluated as profit centers that are the Circuit Division and Radio Division.

Circuit Division manufactures circuit boards, which it sells externally and internally to Radio Division for use in its production process. The managers of both divisions are evaluated based on their divisional profits. Details information about both Circuit Division and Radio Division are as below:

Case A

Case B

Circuit Division:

Capacity in units

200,000

200,000

Number of units sold to external customers

200,000

160,000

Selling price per unit

RM90

RM75

Variable cost per unit

RM70

RM60

Fixed costs per unit (based on capacity)

RM13

RM8

Radio Division:

Number of units needed for production

40,000

40,000

Purchase price per unit from outside supplier

RM86

RM74

Required:

a.Explain the meaning of the term decentralization.

(2 marks)

b.Briefly explain the meaning of transfer price.

(2 marks)

c.Refer to the data in Case A. If both managers of Circuit Division and Radio Division are free to negotiate and make decision on their own, will there be any transfer of circuit board take place in the negotiation? If so, within what range will the transfer price will fall? Provide numerical explanation for your answers.

(8 marks)

d.Refer to the data in Case B. If both managers of Circuit Division and Radio Division are free to negotiate and make decision on their own, will there be any transfer of circuit board take place in the negotiation? If so, within what range will the transfer price will fall? Provide numerical explanation for your answers.

(8 marks)