Zoway Plc. sells and services water purifiers. The company, which has two divisions, 'Zoway Sales' and...

  

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Zoway Plc. sells and services water purifiers. The company, which has two divisions, 'Zoway Sales' and 'Zoway Service', function as profit centres. 'Zoway Sales' sells new water purifiers. The division sells 4,000 water purifiers per year. Included in the selling price is RM48 for a one-year warranty. This means that within the first year of ownership, if the water purifier needs to be serviced, the service costs are not charged to the customer. On average 500 water purifiers are serviced per year. The service work is carried out by 'Zoway Service', who would charge 'Zoway Sales' for doing the service. 'Zoway Service' carries out the service works for 'Zoway Sales', as well as service works for external customers. Customers are charged at cost-plus 50% mark-up. The standard cost and requirement for the next year for 'Zoway Service' are as follows: : RM50 per service Direct material Direct labour Variable overheads Fixed overheads : RM15 per hour : RM10 per labour hour : RM25 per labour hour On average, each service will take 3 labour hours. 'Zoway Service' will charge a transfer price in the same way as the price charged to external customers, i.e. cost-plus 50% mark-up. However, the manager of 'Zoway Sales' now has intentions to have the service done by another company (Service A Sdn. Bhd.) since they have offered to carry out the service works for a fixed fee of RM285 per service, and this is less than the price 'Zoway Service' would charge. Required: (a) Compute the profits of 'Zoway Sales', 'Zoway Service' and Zoway Plc. from the warranty scheme if: (i) The service is done by 'Zoway Service' and are charged at cost-plus 50% mark-up. (ii) The service is done by 'Zoway Service' and are charged at marginal cost. (iii) The service is done by Service A Sdn. Bhd. (b) Explain if the 'cost-plus' transfer pricing in part (a)(i) is suitable for the company? Explain your answer in relation to the objectives of transfer pricing. (c) Discuss TWO (2) qualitative points the manager at 'Zoway Sales' must consider if he /she decides to allow Service A Sdn. Bhd. to carry out the service. Zoway Plc. sells and services water purifiers. The company, which has two divisions, 'Zoway Sales' and 'Zoway Service', function as profit centres. 'Zoway Sales' sells new water purifiers. The division sells 4,000 water purifiers per year. Included in the selling price is RM48 for a one-year warranty. This means that within the first year of ownership, if the water purifier needs to be serviced, the service costs are not charged to the customer. On average 500 water purifiers are serviced per year. The service work is carried out by 'Zoway Service', who would charge 'Zoway Sales' for doing the service. 'Zoway Service' carries out the service works for 'Zoway Sales', as well as service works for external customers. Customers are charged at cost-plus 50% mark-up. The standard cost and requirement for the next year for 'Zoway Service' are as follows: : RM50 per service Direct material Direct labour Variable overheads Fixed overheads : RM15 per hour : RM10 per labour hour : RM25 per labour hour On average, each service will take 3 labour hours. 'Zoway Service' will charge a transfer price in the same way as the price charged to external customers, i.e. cost-plus 50% mark-up. However, the manager of 'Zoway Sales' now has intentions to have the service done by another company (Service A Sdn. Bhd.) since they have offered to carry out the service works for a fixed fee of RM285 per service, and this is less than the price 'Zoway Service' would charge. Required: (a) Compute the profits of 'Zoway Sales', 'Zoway Service' and Zoway Plc. from the warranty scheme if: (i) The service is done by 'Zoway Service' and are charged at cost-plus 50% mark-up. (ii) The service is done by 'Zoway Service' and are charged at marginal cost. (iii) The service is done by Service A Sdn. Bhd. (b) Explain if the 'cost-plus' transfer pricing in part (a)(i) is suitable for the company? Explain your answer in relation to the objectives of transfer pricing. (c) Discuss TWO (2) qualitative points the manager at 'Zoway Sales' must consider if he /she decides to allow Service A Sdn. Bhd. to carry out the service.

Answer rating: 100% (QA)

a i If the service is done by Zoway Service and are charged at costplus 50 markup the profit for Zoway Sales would be 4000 units x RM48 warranty cost ... View the full answer