Question 1

An internal transfer between two divisions is in the best economic interest of the entire organization when:

Accepted Answer

A) the variable costs plus the opportunity cost of the selling division is greater than the external price for the buying division. 
B) the variable costs plus the opportunity cost of the selling division is less than the external price for the buying division. 
C) there is excess capacity in the buying division with no alternative use. 
D) there is no established market prices for the buying division. 
A) the variable costs plus the opportunity cost of the selling division is greater than the external price for the buying division. 
B) the variable costs plus the opportunity cost of the selling division is less than the external price for the buying division. 
C) there is excess capacity in the buying division with no alternative use. 
D) there is no established market prices for the buying division.

Question 2

Which of the following is the most significant disadvantage of a cost-based transfer price? (CIA adapted)

Accepted Answer

A) Requires internally developed information. 
B) Imposes market effects on company operations. 
C) Requires externally developed information. 
D) May not promote long-term efficiencies. 
A) Requires internally developed information. 
B) Imposes market effects on company operations. 
C) Requires externally developed information. 
D) May not promote long-term efficiencies.

Question 3

The GAAP financial reporting rules for segments require that all companies use transfer prices based on market prices.GAAP does not specify what method must be used for transfer pricing except for the oil and gas industry.

Accepted Answer

A) True 
 B)False

Question 4

Avery Corporation has two divisions,A and B,which are both organized as profit centers;Division A produces and sells widgets to Division B and to outside customers.Division A has total costs of $35,$20 of which are variable.Division A is operating significantly below capacity and sells the widgets for $50.Division B has received an offer from an outsider vendor to supply all the widgets it needs (20,000 widgets)at a cost of $45.The manager of Division B is considering the offer but wants to approach Division A first.What is the maximum transfer price from Division A to Division B?

Accepted Answer

A) $20. 
B) $35. 
C) $45. 
D) $50. 
A) $20. 
B) $35. 
C) $45. 
D) $50.

Question 5

A limitation of transfer prices based on actual cost is that they: (CIA adapted)

Accepted Answer

A) charge inefficiencies to the department that is transferring the goods. 
B) charge inefficiencies to the department that is receiving the goods. 
C) must be adjusted by some markup. 
D) lack clarity and administrative convenience. 
A) charge inefficiencies to the department that is transferring the goods. 
B) charge inefficiencies to the department that is receiving the goods. 
C) must be adjusted by some markup. 
D) lack clarity and administrative convenience.

Question 6

Given the following data for Division X:   Division Y would like to purchase 15,000 units each period from Division X.Division X has ample excess capacity to handle all of Division Y's needs.Division Y now purchases from an outside supplier at a price of $20.If Division X refuses to accept an $18 price internally,the company,as a whole,will be worse off by:

Accepted Answer

A) $30,000. 
B) $75,000. 
C) $90,000. 
D) $120,000. 
A) $30,000. 
B) $75,000. 
C) $90,000. 
D) $120,000.

Question 7

A selling division at capacity is indifferent between selling to outsiders and transferring inside at the market price.The profit would be the same in either case.

Accepted Answer

A) True 
 B)False

Question 8

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 opportunity cost of an internal transfer when the market price is $75?

Accepted Answer

A) $20. 
B) $25. 
C) $50. 
D) $60. 
A) $20. 
B) $25. 
C) $50. 
D) $60.

Question 9

From an organization's viewpoint,transfer prices have no effect on total profits assuming the transfer occurs between the two responsibility centers.Total profits are unaffected,divisional profits will have effects but they off-set.

Accepted Answer

A) True 
 B)False

Question 10

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) $60. 
E) $75. 
A) $20. 
B) $25. 
C) $50. 
D) $60. 
E) $75.

Question 11

Parkside Inc.has several divisions that operate as decentralized profit centers.Parkside's Entertainment Division manufactures video arcade equipment using the products of two of Parkside's other divisions.The Plastics Division manufactures plastic components,one type that is made exclusively for the Entertainment Division,while other less complex components are sold to outside markets.The products of the Video Cards Division are sold in a competitive market;however,one video card model is also used by the Entertainment Division.The actual costs per unit used by the Entertainment Division follow: (CMA adapted)   The Plastics Division sells its commercial products at full cost plus a 25% markup and believes the proprietary plastic component made for the Entertainment Division would sell for $6.25 per unit on the open market.The market price of the video card used by the Entertainment Division is $10.98 per unit.Assume that the Plastics Division has excess capacity and it has negotiated a transfer price of $5.60 per plastic component with the Entertainment Division.This price will:

Accepted Answer

A) cause the Plastics Division to reduce the number of commercial plastic components it manufactures. 
B) motivate both divisions as estimated profits are shared. 
C) encourage the Entertainment Division to seek an outside source for plastic components. 
D) demotivate the Plastics Division causing mediocre performance. 
A) cause the Plastics Division to reduce the number of commercial plastic components it manufactures. 
B) motivate both divisions as estimated profits are shared. 
C) encourage the Entertainment Division to seek an outside source for plastic components. 
D) demotivate the Plastics Division causing mediocre performance.

Question 12

When a perfect intermediate market exists,the optimal transfer price is the intermediate market price.In a perfect market,the market price is optimal.

Accepted Answer

A) True 
 B)False

Question 13

In interstate transactions,transfers can reduce an organization's tax liability when the selling division is in a lower tax jurisdiction than the buying division.The transfers can in effect move profits from one jurisdiction to another.

Accepted Answer

A) True 
 B)False

Question 14

Chipper Division of Acme 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.Chipper has a capacity to produce 100,000 units per period.Jones Division currently purchases 10,000 units of part Z-25 from Chipper for $40.Jones has been approached by an outside supplier willing to supply the parts for $36.What is the effect on Acme's overall profit if Chipper ACCEPTS the outside price and Jones continues to buy inside?

Accepted Answer

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

Question 15

A division can sell externally for $60 per unit.Its variable manufacturing costs are $35 per unit,and its variable marketing costs are $12 per unit.What is the optimal transfer price for transferring internally,assuming the division is operating at capacity?

Accepted Answer

A) $12. 
B) $35. 
C) $47. 
D) $60. 
A) $12. 
B) $35. 
C) $47. 
D) $60.

Question 16

The Alpha Division of a company,which is operating at capacity,produces and sells 1,000 units of a certain electronic component in a perfectly competitive market.Revenue and cost data are as follows: (CIA adapted)   The minimum transfer price that should be charged to the Beta Division of the same company for each component is:

Accepted Answer

A) $12. 
B) $34. 
C) $46. 
D) $50. 
A) $12. 
B) $34. 
C) $46. 
D) $50.

Question 17

Chipper Division of Acme 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.Chipper has a capacity to produce 100,000 units per period.Jones Division currently purchases 10,000 units of part Z-25 from Chipper for $40.Jones has been approached by an outside supplier willing to supply the parts for $36.What is the effect on Acme's overall profit if Chipper REFUSES the outside price and Jones decides to buy outside?

Accepted Answer

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

Question 18

Cruises,Inc. ,operates two divisions: (1)a management division that owns and manages cruise ships in the Florida Keys and (2)a repair division that operates a dry dock in Marble Sand Florida.The repair division works on company ships,as well as other large-hull ships.The repair division has an estimated variable cost of $28.50 per labor-hour.The repair division has a backlog of work for outside ships.They charge $48.00 per hour for labor,which is standard for this type of work.The management division complained that it could hire its own repair workers for $30.00 per hour,including leasing an adequate work area.What is the maximum transfer price per hour that the management division should pay?

Accepted Answer

A) $28.50. 
B) $30.00. 
C) $39.00. 
D) $46.50. 
A) $28.50. 
B) $30.00. 
C) $39.00. 
D) $46.50.

Question 19

Cohasset Company currently manufactures all component parts used in the manufacture of various hand tools.Hurley Division produces a steel handle used in three different tools.The budget for these handles is 120,000 units with the following unit cost.   Ironwood Division purchases 20,000 handles from Hurley Division and completes the hand tools.An outside supplier,R & M Steel,has offered to supply 20,000 units of the handle to Ironwood Division for $1.25 per unit.Hurley currently has idle capacity that cannot be used.What is the cost impact to Cohasset as a whole of purchasing from R & M Steel? (CMA adapted)

Accepted Answer

A) increase the handle unit cost by $0.05. 
B) increase the handle unit cost by $0.15. 
C) decrease the handle unit cost by $0.15. 
D) decrease the handle unit cost by $0.25. 
A) increase the handle unit cost by $0.05. 
B) increase the handle unit cost by $0.15. 
C) decrease the handle unit cost by $0.15. 
D) decrease the handle unit cost by $0.25.

Question 20

The use of an optimal transfer price eliminates potential conflicts between an organization's interests and the divisional manager's interest.Conflicts may be reduced,but will not be eliminated.

Accepted Answer

A) True 
 B)False

An internal transfer between two divisions is in the best economic interest of the entire organization when:

Which of the following is the most significant disadvantage of a cost-based transfer price? (CIA adapted)

The GAAP financial reporting rules for segments require that all companies use transfer prices based on market prices.GAAP does not specify what method must be used for transfer pricing except for the oil and gas industry.

A limitation of transfer prices based on actual cost is that they: (CIA adapted)

A selling division at capacity is indifferent between selling to outsiders and transferring inside at the market price.The profit would be the same in either case.

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 opportunity cost of an internal transfer when the market price is $75?

From an organization's viewpoint,transfer prices have no effect on total profits assuming the transfer occurs between the two responsibility centers.Total profits are unaffected,divisional profits will have effects but they off-set.

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?

When a perfect intermediate market exists,the optimal transfer price is the intermediate market price.In a perfect market,the market price is optimal.

In interstate transactions,transfers can reduce an organization's tax liability when the selling division is in a lower tax jurisdiction than the buying division.The transfers can in effect move profits from one jurisdiction to another.

A division can sell externally for $60 per unit.Its variable manufacturing costs are $35 per unit,and its variable marketing costs are $12 per unit.What is the optimal transfer price for transferring internally,assuming the division is operating at capacity?

The use of an optimal transfer price eliminates potential conflicts between an organization's interests and the divisional manager's interest.Conflicts may be reduced,but will not be eliminated.

Cost Accounting: Information for Decision Making

Cost Concepts and Behavior

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

An internal transfer between two divisions is in the best economic interest of the entire organization when:

Which of the following is the most significant disadvantage of a cost-based transfer price? (CIA adapted)

The GAAP financial reporting rules for segments require that all companies use transfer prices based on market prices.GAAP does not specify what method must be used for transfer pricing except for the oil and gas industry.

A limitation of transfer prices based on actual cost is that they: (CIA adapted)

A selling division at capacity is indifferent between selling to outsiders and transferring inside at the market price.The profit would be the same in either case.

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 opportunity cost of an internal transfer when the market price is $75?

From an organization's viewpoint,transfer prices have no effect on total profits assuming the transfer occurs between the two responsibility centers.Total profits are unaffected,divisional profits will have effects but they off-set.

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?

When a perfect intermediate market exists,the optimal transfer price is the intermediate market price.In a perfect market,the market price is optimal.

In interstate transactions,transfers can reduce an organization's tax liability when the selling division is in a lower tax jurisdiction than the buying division.The transfers can in effect move profits from one jurisdiction to another.

A division can sell externally for $60 per unit.Its variable manufacturing costs are $35 per unit,and its variable marketing costs are $12 per unit.What is the optimal transfer price for transferring internally,assuming the division is operating at capacity?

The use of an optimal transfer price eliminates potential conflicts between an organization's interests and the divisional manager's interest.Conflicts may be reduced,but will not be eliminated.

Cost Accounting: Information for Decision Making

Cost Concepts and Behavior

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