QUESTION :

TU Berhad is a highly decentralized company. The company has two divisions in Kuching, the machining division, and the equipment division. Each division manager has total control over sourcing and selling decisions. The machining division purchases raw materials and makes component X-T1 and sells it to the equipment division as an immediate product to produce a customized equipment for factories in the Sarawak area. 2 Currently, the equipment division purchases 10,000 X-T1 components from the machining division for RM16 each unit. Recently, the machining division planned to purchase new equipment and wants to raise the transfer price to RM18 per unit. The manager of the equipment division states that the division cannot afford to go that high, as it will reduce the division's profit to near zero. Thus, an external supplier offers an equipment division the opportunity to purchase the same component for RM16 per unit. The machining division's variable costs of RM13 are the incremental costs per unit that are incurred to produce each unit, and fixed costs per unit are RM5 due to the recent purchase of equipment by the machining division.

Compute the advantage or disadvantage of annual operating income to TU Berhad as a whole if the equipment division purchase internally from the machining division under each of the following cases:

please answer this question.

a) The machining division can use the facilities for other production operations, which will result in annual cash operating savings of RM39,000.

and

b) The machining division has no alternative use for its facilities and the external supplier reduces the price to RM15 per unit.