Question 1

Given a competitive outside market for identical intermediate goods,what is the best transfer price,assuming all relevant information is readily available?

Accepted Answer

A)  Standard production cost per unit. 
B)  Market price of the intermediate goods. 
C)  Actual full cost per unit plus a normal markup. 
D)  Market price of the final goods less any opportunity costs. 
A)  Standard production cost per unit. 
B)  Market price of the intermediate goods. 
C)  Actual full cost per unit plus a normal markup. 
D)  Market price of the final goods less any opportunity costs.

Question 2

In general,negotiated transfer prices fall in a range between the selling division's differential costs and the buying division's market price.

Accepted Answer

A) True 
 B)False

Question 3

Shipping Industries is a decentralized company that evaluates its divisions based on ROI.The North Division has the capacity to produce 2,000 units of a component.The North Division's variable costs are $85 per unit;fixed costs are $70 per unit.The South Division can use the product as a component in one of its products.The South Division would incur $65 of variable costs to convert the component into its own product which sells for $310.Required:
(consider each question independent of each other):
a.Assume the North Division can sell all that it produces for $185 each.The South Division needs 100 units.What is the appropriate transfer price?
b.Assume the North Division can sell 1,800 units at $265.Any excess capacity will be unused unless the units are purchased by the South Division (which can use up to 100 units).What are the minimum and maximum transfer prices?

Accepted Answer

a.North is at full capacity: market pric

Question 4

Martin Company currently manufactures all component parts used in the manufacture of various hand tools.The Extruding Division produces a steel handle used in three different tools.The budget for these handles is 120,000 units with the following unit cost.$$\begin{array} { | l | r | } 
\hline \text { Direct material } & \$ .60 \
\hline \text { Direct labor } & .40 \
\hline \text { Variable overhead } & .10 \
\hline \text { Fixed overhead } & \underline{.20} \
\hline \text { Total unit cost } & \$ 1.30 \
\hline
\end{array}$$Polishing Division purchases 20,000 handles from the Extruding Division and completes the hand tools.An outside supplier,Venture Steel,has offered to supply 20,000 units of the handle to Polishing Division for $1.25 per unit.The Extruding Division currently has idle capacity that cannot be used.If Martin would like to develop a range of transfer prices,what would be the minimum transfer price that Extruding would be willing to accept?

Accepted Answer

A)  $1.00. 
B)  $1.10. 
C)  $1.25. 
D)  $1.30. 
A)  $1.00. 
B)  $1.10. 
C)  $1.25. 
D)  $1.30.

Question 5

Calvin Machinery Company manufactures heavy-duty equipment used in foundries,mining operations,and similar operations.The company is very decentralized,with various division managers having control over capital investments and most production decisions.The Cylinder Division fabricates a component which is used by the Press Division in its production of metal presses.The Cylinder Division has been selling to the Press Division at a price of $3,000 per unit.Because of a cost increase,the Cylinder Division wants to increase its price to $3,200,even though the Press Division can still purchase an equivalent component externally for $3,000.The following information has been gathered regarding this issue:$\begin{array}{|l|l|}
\hline \text { Press Division's annual purchases } & 100 \text { units } \
\hline \text { Cylinder Divisior's variable costs } & \$ 2,400 \text { per unit } \
\hline \text { Cylinder Divisior's fixed costs } & \$ 600 \text { per unit } \
\hline
\end{array}$
Required:
a.If the Press Division buys its units externally,the Cylinder Division will have idle capacity for which there are no alternative uses.Will the company as whole benefit if the Press Division purchases its units externally for $3,000 per unit?
b.If the Press Division buys its units externally,the Cylinder Division will have idle capacity which can be used to generate a positive cash flow of $40,000.Will the company as whole benefit if the Press Division purchases its units externally for $3,000 per unit?
c.Refer to (b).Will your answer change if the price at which the Press Division can buy externally decreases to $2,700 per unit? Support your answer.

Accepted Answer

a.External purchase: 100 × $3,000 = $3

Question 6

Tax avoidance is unethical when inflated transfer prices are used in international transactions to shift profits from a division in one country to a division in another country.

Accepted Answer

A) True 
 B)False

Question 7

Frocks and Gowns Inc. ,has two divisions,Day Wear and Night Wear.The Day Wear Division has an investment base of $750,000 and produces (and sells)100,000 units of Collars at a market price of $10.00 per unit.Variable costs total $3.50 per unit,and fixed charges are $4.00 per unit (based on a capacity of 120,000 units).The Night Wear Division wants to purchase 25,000 units of Collars from The Day Wear Division.However,the Night Wear Division is only willing to pay $6.75 per unit.What is the minimum transfer price for the 25,000 unit order that the Day Wear Division would accept if it wishes to maintain its pre-order contribution?

Accepted Answer

A)  $3.50. 
B)  $4.00. 
C)  $4.80. 
D)  $6.00. 
A)  $3.50. 
B)  $4.00. 
C)  $4.80. 
D)  $6.00.

Question 8

The Stake Division of the Outdoor Lumination Company produces stakes which can be sold to outside customers or transferred to the Solar Light Division of the Outdoor Lumination Company.Last year,the Solar Light Division bought 50,000 stakes from the Stake Division at $2.50 each.The following data are available for last year's activities in the Stake Division:
  In order to sell 50,000 stakes to the Solar Light Division,the Stake Division must give up sales of 30,000 stakes to outside customers.That is,the Stake Division could sell 380,000 stakes each year to outside customers (rather than only 350,000 stakes as shown above)if it were not making sales to the Solar Light Division.According to the formula in the text,what is the lowest acceptable transfer price from the viewpoint of the selling division?

Accepted Answer

A)  $2.50. 
B)  $2.00. 
C)  $2.60. 
D)  $3.00. 
A)  $2.50. 
B)  $2.00. 
C)  $2.60. 
D)  $3.00.

Question 9

Thai Company has two divisions organized as profit centers: Redmon and Tomlin.Thai expects the following results:$$\begin{array} { | l | r | r | } 
\hline & \text { Reckon } & \text { Tomlin } \
\hline \text { Sales } & & \
\hline \text { Redmon: } ( 10,000 \times \$ 16 ) & \$ 1,600,000 & \
\hline \text { Tomlin: } ( 250,000 \times \$ 7.20 ) & & \$ 1,800,000 \
\hline \text { Variable costs } & 1,360,000 & 1,000,000 \
\hline \text { Contribution margin } & \$ 240,000 & \$ 800,000 \
\hline \text { Fixed costs } & 160,000 & 460,000 \
\hline \text { Profit } & \$ 80,000 & \$ 340,000 \
\hline
\end{array}$$
Included in Redmon's costs are 100,000 units of a subcomponent purchased from an outside supplier for $4.50.The managers have recently initiated negotiations for Tomlin to supply the components to Redmon.Tomlin has a total capacity of 400,000 units.Required:
a.Would Thai Company prefer the subcomponent used by Redmon to be purchased internally from Tomlin or from the outside vendor? What would be the profit impact?
b.What would be the maximum and minimum transfer prices?

Accepted Answer

a.Internal cost = variable cost = $1,00

Question 10

An intermediate market is perfect when:

Accepted Answer

A)  there are no quality differences between inside and outside suppliers. 
B)  there are quality differences between inside and outside customers. 
C)  buyers and sellers can sell any quantity without affecting the market price. 
D)  buyers and sellers are motivated to make decisions that are consistent with those of the organization. 
A)  there are no quality differences between inside and outside suppliers. 
B)  there are quality differences between inside and outside customers. 
C)  buyers and sellers can sell any quantity without affecting the market price. 
D)  buyers and sellers are motivated to make decisions that are consistent with those of the organization.

Question 11

Division A of Spangler Company expects the following results: 
Division B has the opportunity to buy its needs of 5,000 units from an outside supplier at $45 each.Assume that Division A cannot increase sales to outsiders.Required:
a.What would be the optimal transfer price?
b.Assume that Spangler allows the divisional managers to negotiate transfer prices.What would the maximum transfer price be?
c.Assume that Spangler allows the divisional managers to negotiate transfer prices.What would the minimum transfer price be?

Accepted Answer

a.Division A operating at less than cap

Question 12

When actual costs are used as the basis for a transfer,inefficiencies of the selling division are transferred to the buying division.

Accepted Answer

A) True 
 B)False

Question 13

Concrete Corporation has two producing centers,Contractor and Retailer.The Contractor Division has a variable cost of $12 for its products and a total fixed cost of $120,000.The Contractor Division also has idle capacity for up to 50,000 units per month.The Retailer Division would like to purchase 20,000 units of the Contractor Division's products per month,but is unable to convince the Contractor Division to transfer units to the Retailer Division at $16 per unit.The Contractor Division has consistently argued that the market price of $20 is nonnegotiable.What is The Contractor Division's opportunity cost of not transferring units to the Retailer Division?

Accepted Answer

A)  $20. 
B)  $12. 
C)  $8. 
D)  $4. 
A)  $20. 
B)  $12. 
C)  $8. 
D)  $4.

Question 14

Which of the following statements is(are)true? (A)If a transfer has no effect on divisional profit,managers will be indifferent between making the transfer or not.(B)If an intermediate market exists but divisions are prohibited from buying or selling from the outside,the intermediate market can be ignored in determining the optimal transfer price.

Accepted Answer

A)  Only A is true. 
B)  Only B is true. 
C)  Both A and B are true. 
D)  Neither A nor B is true. 
A)  Only A is true. 
B)  Only B is true. 
C)  Both A and B are true. 
D)  Neither A nor B is true.

Question 15

The Measurement Division of Flow Co.produces pumps which it sells for $20 each to outside customers.The Measurement Division's cost per pump,based on normal volume of 500,000 units per period,is shown below: $$\begin{array} { | l | r | } 
\hline \text { Variable costs } & \$ 12 \
\hline \text { Fixed ouerhead } & \underline{3} \
\hline \text { Total } &\underline{ \$ 15} \
\hline
\end{array}$$
Flow has recently purchased a small company which makes sprinkler systems.This new company is presently purchasing 100,000 pumps each year from another manufacturer.Since the Measurement Division has a capacity of 600,000 pumps per year and is now selling only 500,000 pumps to outside customers,management would like the new Sprinkler Division to begin purchasing its pumps internally.The Sprinkler Division is now paying $20 per pump,less a 10% quantity discount.The Measurement Division could avoid $1 per unit in variable costs on any sales to the Sprinkler Division.Required:
a.Treating each division as an independent profit center,within what price range should the internal sales price fall?
b.Now assume that the Measurement Division is selling 600,000 pumps per year on the outside.Determine the appropriate transfer price.Show all computations.(Note: Due to limitations in fonts and word processing software,> and < signs must be used in this solution rather than "greater than or equal to" and "less than or equal to" signs. )

Accepted Answer

a.Current price being paid by the Sprink

Question 16

Martin Company currently manufactures all component parts used in the manufacture of various hand tools.The Extruding Division produces a steel handle used in three different tools.The budget for these handles is 120,000 units with the following unit cost.$$\begin{array} { | l | r | } 
\hline \text { Direct material } & \$ .60 \
\hline \text { Direct labor } & .40 \
\hline \text { Variable overhead } & .10 \
\hline \text { Fixed overhead } & \underline{.20} \
\hline \text { Total unit cost } & \$ 1.30 \
\hline
\end{array}$$Polishing Division purchases 20,000 handles from the Extruding Division and completes the hand tools.An outside supplier,Venture Steel,has offered to supply 20,000 units of the handle to Polishing Division for $1.25 per unit.The Extruding Division currently has idle capacity that cannot be used.If Martin would like to develop a range of transfer prices,what would be the maximum transfer price that Polishing would be willing to pay?

Accepted Answer

A)  $1.00. 
B)  $1.10. 
C)  $1.25. 
D)  $1.30. 
A)  $1.00. 
B)  $1.10. 
C)  $1.25. 
D)  $1.30.

Question 17

The Lock Division of Morgantown Corp.sells 80,000 units of part Z-25 to the outside market.Part Z-25 sells for $40,has a variable cost of $22,and a fixed cost per unit of $10.The Lock Division has a capacity to produce 100,000 units per period.The Cabinet Division currently purchases 10,000 units of part Z-25 from the Lock Division for $40.The Cabinet Division has been approached by an outside supplier willing to supply the parts for $36.What is the effect on Morgantown's overall profit if the Lock Division accepts the outside price and the Cabinet Division continues to buy inside?

Accepted Answer

A)  No change in Morgantown's profits. 
B)  $140,000 decrease in Morgantown's profits. 
C)  $80,000 decrease in Morgantown's profits. 
D)  $40,000 increase in Morgantown's profits. 
A)  No change in Morgantown's profits. 
B)  $140,000 decrease in Morgantown's profits. 
C)  $80,000 decrease in Morgantown's profits. 
D)  $40,000 increase in Morgantown's profits.

Question 18

Division X has asked Division K of the Easton Company to supply it with 5,000 units of part L433 this year to use in one of its products.Division X has received a bid from an outside supplier for the parts at a price of $26.00 per unit.Division K has the capacity to produce 30,000 units of part L433 per year.Division K expects to sell 26,000 units of part L433 to outside customers this year at a price of $30.00 per unit.To fill the order from Division X,Division K would have to cut back its sales to outside customers.Division K produces part L433 at a variable cost of $21.00 per unit.The cost of packing and shipping the parts for outside customers is $2.00 per unit.These packing and shipping costs would not have to be incurred on sales of the parts to Division X.Required:
a.What is the range of transfer prices within which both the Divisions' profits would increase as a result of agreeing to the transfer of 5,000 parts this year from Division X to Division K?
b.Is it in the best interests of the overall Easton Company for this transfer to take place? Explain.

Accepted Answer

(Note: Due to limitations in fonts and w

Question 19

Division A has variable manufacturing costs of $50 per unit and fixed costs of $10 per unit.Assuming that Division A is operating at capacity,what is the optimal transfer price of an internal transfer when the market price is $75?

Accepted Answer

A)  $20. 
B)  $25. 
C)  $50. 
D)  $75. 
A)  $20. 
B)  $25. 
C)  $50. 
D)  $75.

Question 20

A company is highly centralized.The Cutting Division,which is operating at capacity,produces a component that it currently sells in a perfectly competitive market for $13 per unit.At the current level of production,the fixed cost of producing this component is $4 per unit and the variable cost is $7 per unit.Grinding Division would like to purchase this component from the Cutting Division.The price that the Cutting Division should charge the Grinding Division per unit for this component is:

Accepted Answer

A)  $7. 
B)  $11. 
C)  $13. 
D)  $15. 
A)  $7. 
B)  $11. 
C)  $13. 
D)  $15.

Given a competitive outside market for identical intermediate goods,what is the best transfer price,assuming all relevant information is readily available?

In general,negotiated transfer prices fall in a range between the selling division's differential costs and the buying division's market price.

Tax avoidance is unethical when inflated transfer prices are used in international transactions to shift profits from a division in one country to a division in another country.

An intermediate market is perfect when:

When actual costs are used as the basis for a transfer,inefficiencies of the selling division are transferred to the buying division.

Division A has variable manufacturing costs of $50 per unit and fixed costs of $10 per unit.Assuming that Division A is operating at capacity,what is the optimal transfer price of an internal transfer when the market price is $75?

Cost Accounting: Information for Decision Making

Fundamentals of Cost-Volume-Profit Analysis

Fundamentals of Cost Analysis for Decision Making

Cost Estimation

Fundamentals of Product and Service Costing

Job Costing

Process Costing

Activity-Based Costing

Fundamentals of Cost Management

Service Department and Joint Cost Allocation

Fundamentals of Management Control Systems

Planning and Budgeting

Business Unit Performance Measurement

Fundamentals of Variance Analysis

Additional Topics in Variance Analysis

Performance Measurement to Support Business Strategy

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Exam 15: Transfer Pricing

Given a competitive outside market for identical intermediate goods,what is the best transfer price,assuming all relevant information is readily available?

In general,negotiated transfer prices fall in a range between the selling division's differential costs and the buying division's market price.

Tax avoidance is unethical when inflated transfer prices are used in international transactions to shift profits from a division in one country to a division in another country.

An intermediate market is perfect when:

When actual costs are used as the basis for a transfer,inefficiencies of the selling division are transferred to the buying division.

Division A has variable manufacturing costs of $50 per unit and fixed costs of $10 per unit.Assuming that Division A is operating at capacity,what is the optimal transfer price of an internal transfer when the market price is $75?

Cost Accounting: Information for Decision Making

Fundamentals of Cost-Volume-Profit Analysis

Fundamentals of Cost Analysis for Decision Making

Cost Estimation

Fundamentals of Product and Service Costing

Job Costing

Process Costing

Activity-Based Costing

Fundamentals of Cost Management

Service Department and Joint Cost Allocation

Fundamentals of Management Control Systems

Planning and Budgeting

Business Unit Performance Measurement

Fundamentals of Variance Analysis

Additional Topics in Variance Analysis

Performance Measurement to Support Business Strategy

Filters