Cable Network System Bhd (CNS) is a supplier of equipment to telecommunication companies such as Maxis, Celcom and Astro. It has two division, Component Division and the Equipment Division. CNS adopts a decentralized management system where managers are essentially free to determine whether goods will be transferred internally and what would be the internal transfer prices. CNS policy is that for all internal transfers between divisions, the transfer price be expressed on a full cost basis. The markup in the full cost arrangement is left to the discretion of divisional managers. The managers of the two division held a meeting to discuss on the pricing arrangement for a mini- antennae produced by the component division. Production of the mini-antennae is currently at full capacity. The Component Division can sell the mini-antennae for RM 46.50 to outside customers. The Equipment Division can also buy the mini-antennae from external sources for the same price. The manager of the Equipment Division is hoping to obtain a price concession from the Components Division by buying internally. The full cost of manufacturing the mini-antennae is RM 30.00. If Component Division sells the mini-antennae internally, RM 6.00 of the selling and distribution costs can be avoided. After some discussion, the two division managers agreed on a full cost-plus pricing scheme that would be reviewed annually. Any increase in the outside selling price would be readjusted to reflect on the agreed transfer price by both divisions.  Any major changes in the factors that led to the agreement would initiate a new round of negotiations. Otherwise, the full cost-plus arrangement would continue in force for subsequent years. Required: What is the minimum and maximum transfer prices? Assume that the transfer price agreed on between the two managers is halfway between the minimum and maximum transfer prices. Calculate this transfer price. What markup over the full cost is implied by this transfer price? Refer to Requirement 2. Assume that in the following year, the outside price of mini speaker increases to RM 49.50. What is the full cost-plus transfer price?               Assume that 2 years after the initial agreement, the market for mini-antennae has softened considerably, causing excess capacity for the Components Division. Would you expect a renegotiation of the full cost-plus pricing arrangement for the coming year?  Explain.

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Asked Jan 21, 2020
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Cable Network System Bhd (CNS) is a supplier of equipment to telecommunication companies such as Maxis, Celcom and Astro. It has two division, Component Division and the Equipment Division. CNS adopts a decentralized management system where managers are essentially free to determine whether goods will be transferred internally and what would be the internal transfer prices. CNS policy is that for all internal transfers between divisions, the transfer price be expressed on a full cost basis.

 

The markup in the full cost arrangement is left to the discretion of divisional managers. The managers of the two division held a meeting to discuss on the pricing arrangement for a mini- antennae produced by the component division. Production of the mini-antennae is currently at full capacity. The Component Division can sell the mini-antennae for RM 46.50 to outside customers. The Equipment Division can also buy the mini-antennae from external sources for the same price. The manager of the Equipment Division is hoping to obtain a price concession from the Components Division by buying internally. The full cost of manufacturing the mini-antennae is RM 30.00. If Component Division sells the mini-antennae internally, RM 6.00 of the selling and distribution costs can be avoided.

 

After some discussion, the two division managers agreed on a full cost-plus pricing scheme that would be reviewed annually. Any increase in the outside selling price would be readjusted to reflect on the agreed transfer price by both divisions.  Any major changes in the factors that led to the agreement would initiate a new round of negotiations. Otherwise, the full cost-plus arrangement would continue in force for subsequent years.

 

Required:

 

  1. What is the minimum and maximum transfer prices?

 

  1. Assume that the transfer price agreed on between the two managers is halfway between the minimum and maximum transfer prices. Calculate this transfer price. What markup over the full cost is implied by this transfer price?

 

  1. Refer to Requirement 2. Assume that in the following year, the outside price of mini speaker increases to RM 49.50. What is the full cost-plus transfer price?

               

  1. Assume that 2 years after the initial agreement, the market for mini-antennae has softened considerably, causing excess capacity for the Components Division. Would you expect a renegotiation of the full cost-plus pricing arrangement for the coming year?  Explain.

 

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Expert Answer

Step 1

Hey, since there are multiple sub parts posted, we will answer first three subparts alone.

Step 2

Minimum and maximum transfer price:

 

The minimum transfer price is $46.50, (the selling price to the outside customers).

 

The minimum transfer price is $40.50, (the selling price less the selling and distribution cost).

Step 3

Computation of new transfer price and ma...

Accounting homework question answer, step 3, image 1
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