Management Accounting Assignment
2) Under what conditions should a buying division be forced to buy from an internal supplier? Under what conditions should a selling division be forced to sell to an internal division, rather than to outside customer? (20m)
Frequently buying division will be required to buy from within the company as long as the selling division can provide goods of comparable quality and prices. Based on the situation, for example, suppose the window division can acquire the same component from within the company at a price of RM138 per set of frame. It can be expected to reject the transfer price of RM140 per set of frame from an outside supplier. In this case, it is better for the buying division to buy internally by doing so it will save RM2 per set (RM140 - RM138). It will be cost-effective for the division to buy the frame from within the company. Profits of window division will increase due to cost saving in component purchase by RM2 per set. Secondly, selling division changes in technology to provide better products or produce their products more efficiently. Companies must create their own or use emerging technologies to compete in the future. For example, advances in produce frame machine have made the quality and materials of frame much high quality and anti rust. In this case, buying division is no reason reject to buy internally from the selling division. Third, when the goods being transferred are unique or when special equipment must be acquired to produce the items from internal supplier. These special situations could be viewed as opportunity costs since the producing division could have used those resources for more profitable activities. Fourth, the company need to make customers more confidence in the company by using own product to create a better reputation of the company. Selling division should not normally be forced to sell to an internal division if it doesn’t want to. If the top management really wants the division to sell internally, it should provide
Frequently buying division will be required to buy from within the company as long as the selling division can provide goods of comparable quality and prices. Based on the situation, for example, suppose the window division can acquire the same component from within the company at a price of RM138 per set of frame. It can be expected to reject the transfer price of RM140 per set of frame from an outside supplier. In this case, it is better for the buying division to buy internally by doing so it will save RM2 per set (RM140 - RM138). It will be cost-effective for the division to buy the frame from within the company. Profits of window division will increase due to cost saving in component purchase by RM2 per set. Secondly, selling division changes in technology to provide better products or produce their products more efficiently. Companies must create their own or use emerging technologies to compete in the future. For example, advances in produce frame machine have made the quality and materials of frame much high quality and anti rust. In this case, buying division is no reason reject to buy internally from the selling division. Third, when the goods being transferred are unique or when special equipment must be acquired to produce the items from internal supplier. These special situations could be viewed as opportunity costs since the producing division could have used those resources for more profitable activities. Fourth, the company need to make customers more confidence in the company by using own product to create a better reputation of the company. Selling division should not normally be forced to sell to an internal division if it doesn’t want to. If the top management really wants the division to sell internally, it should provide