QUESTION 2 HD Electronics Sdn Bhd is a manufacturer of electronic alarm systems for home and commercial use. Last year HD Electronic Sdn Bhd introduced its first security camera. This basic model, call the HDCAM has become a best seller. HD Electronic Sdn Bhd has two divisions, the Product Division and the Electronics Division The Electronics Division manufactures all the electronic components that is required by the Product Division to assemble the alarm systems and the HDCAM. All the electronic components manufactured by the Electronic Division can be sold to outside customers. However, the company's policy is that all components manufactured by the Electronics Division is to be used internally. All internal transfers are to be done at full cost. One of the key component manufactured by the Electronics Division is an electronic circuit board, EC200 which is used in the assembly of HDCAM. Recently, HD Electronics Sdn Bhd appointed a new General Manager and one of his key task was to review the current transfer pricing policy of the company. His concern is that the current transfer pricing policy may lead to division manager making decisions that would be suboptimal to the company as a whole. As part of the review, he gathered some information on component EC200 which is used by the Product Department in the production of HDCAM. The product division sell 48,000 units of the HDCAM at a unit price of RM 80.00. The cost of manufacturing HDCAM is as follows: Items RM Component EC200 12.35 Direct material cost 23.75 Direct labor cost 5.85 Variable overhead cost 1.90 Fixed overhead cost 28.15 Total unit cost 72.00 The manager of the Electronic Division indicated that they were producing at full capacity of 48,000 units for the EC200 components. All of these 48,000 units have an external market and can be sold to outside buyers at RM 23.00 per unit. The manager of the Electronics Division provided the following information: Continued... Items Direct material cost Direct labor cost Variable overhead cost Fixed overhead cost Total unit cost RM 4.75 0.95 1.90 4.75 12.35 Required: a) Compute the total contribution margin in relation to component EC200 and HDCAM for both Divisions. What is the total contribution margin for HD Electronics Sdn Bhd as a whole? (8 marks) b) Suppose the General Manager abolishes the current transfer pricing policy and allows the division managers the autonomy to set the transfer price. What is the minimum transfer price that the manager of the Electronic division would set for EC2002 (4 marks) c) Based on the transfer price calculated in (b) what is the total unit cost of production of the HDCAM for the Product Division? At this transfer price, will the Product Division make a loss? What course of action(s) would the manager of the Product Division consider to take? Explain your answer. (10 marks) d) Assume now that the external market for EC200 has softened and only 45,000 units of EC200 can be sold externally. There is no external market for the remaining 3,000 units of EC200. What is the transfer price for the 3,000 units that the Electronic Division would offer to the Product Division? Explain your answer. (3 marks) [Total 25 mark]