QUESTION 5 Mekar Bhd. operates two autonomous divisions: X and Z. Division X produces Component Tee with a ready competitive market. Division Z can use this component for its product. Currently, Division Z is selling 500 units of its product at RM2,400 per unit. The market price for the component is RM1,400 per unit. The variable cost of Division X is RM1,040 per unit, while the variable cost of Division Z, other than component costs, is RM1,200 per unit. The manager of Division Z feels that Division X should transfer Component Tee to his division at a price lower than the market because at the market price, Division Z is unable to make profit. Division X is willing to sell to Division Z at a 20 percent reduction in price. The capacity for Division X is 1,000 units, and is only able to sell 500 units in the open market. Required: a) Based on the transfer pricing rule, what should be the transfer price? (2 marks) b) Should the transfers be made and at what price? Explain. To support your decision, prepare a schedule showing comparisons of contribution margins for each division and the group as a whole under three different alternatives: (1) transfer price as in (a), (ii) transfer price at 20 percent reduction from market price, and (iii) no transfer. (11 marks) c) Discuss the effect on transfer price if Division X is able to sell all 1, 000 units in the open market. (2 marks) (Total: 15 marks)