Exam 20: Transfer Pricing in Divisionalized Companies

Figure 20-7 The Engine Division provides engines for the Tractor Division of a company. The standard unit costs for Engine Division are as follows: -Refer to Figure 20-7. What is the best transfer price to avoid transfer price problems?

Figure 20-5 Allied Industries has two divisions: the Bradley Division and the Rommel Division. Information about the component that the Bradley Division produces is as follows: The Bradley Division can produce up to 12,000 components per year. The Rommel Division needs 800 units of the component for a product it manufactures. -Refer to Figure 20-5. The maximum transfer price that the Rommel Division would be willing to pay is

What is the role of transfer pricing in a decentralized firm?

Figure 21-8 At the beginning of the year, Grant Company initiated a quality improvement program. The program was successful in reducing scrap and rework costs. To help assess the impact of the quality improvement program, the following data were collected for the current and preceding years: -Transfer pricing is used when:

Halber Industries is a decentralized company that evaluates its divisions based on ROI. The Brock Division has the capacity to make 2,000 units of a component. The Brock Division's variable costs are £80 per unit. The Cliff Division can use the Brock component in the manufacturing of one of its own products. The Cliff Division would incur £60 of variable costs to convert the component into its own product, which sells for £300. Required: The following requirements are independent of each other: a. Assume the Brock Division can sell all of the components that it produces for £180 each. The Cliff Division needs 100 units. What is the correct transfer price? b. Assume the Brock Division can sell 1,800 units at £260. Any excess capacity will be unused unless the units are purchased by the Cliff Division, which could use up to 100 units. Determine the minimum transfer price that the Brock Division would be willing to accept. Determine the maximum transfer price that the Cliff Division would be willing to pay.

British International has a division in the United States that produces tires for automobiles. These tires are transferred to an automobile division in Germany. The tires can be (and are) sold externally in the United States for £60 each. The cost to produce a tire is £40. It costs £3 per tire for shipping and £5 per tire for import duties. When the tires are sold externally, British International spends £2 per tire for commissions and an average of £1 per tire for advertising. An acceptable markup is 30 per cent of costs. What is the transfer price if the cost-plus method is used?

In most cases, ____ transfer prices achieve the optimal outcome for both the divisions and the company as a whole.

Figure 20-6 Callahan Industries is a decentralized company that evaluates its divisions based on ROI. The Jones Division has the capacity to make 5,000 units of a component. The Jones Division's variable costs are £200 per unit. The Thomas Division can use the component in one of its products. The Thomas Division would incur £100 of variable costs to put the component in its own product that sells for £500. -Refer to Figure 20-6. The Jones Division can sell all that it produces for £360 each. The Jones Division needs 200 units. What is the correct transfer price?

The optimal transfer price from the viewpoint of the company is

Figure 20-2 Klaehn Industries is a decentralized company that evaluates its divisions based on ROI. The Fahl Division has the capacity to make 1,000 units of a component. The Fahl Division's variable costs are £40 per unit. The Melton Division can use the component in one of its products. The Melton Division would incur £50 of variable costs to convert the component into its own product that sells for £160. -Refer to Figure 20-2. Assume the Fahl Division can sell 800 units at £120 each. Any excess capacity will be unused unless the units are purchased by the Melton Division, which could use up to 100 units. The minimum transfer price that the Fahl Division would be willing to accept would be

Negotiated prices transfer prices are:

Figure 20-10 Gregg Manufacturing has one plant located in Belgium and another plant located in the United States. The Belgium plant manufactures a component used in a finished product manufactured at the U.S. plant. Currently, the Belgium plant is operating at 70 per cent capacity. In Belgium, the income tax rate is 30 per cent; in the United States, the corporate income tax rate is 35 per cent. The market price of the component is £280 and the Belgium plant's costs to manufacture the component are as follows: -Refer to Figure 20-10. What is the maximum transfer price that the U.S. division would be willing to pay?

When there is an outside market for an intermediate product which is perfectly competitive, the most equitable method of transfer pricing is

The opportunity cost approach to setting a transfer price would set the maximum transfer price as

The opportunity cost approach to setting a transfer price would set the minimum transfer price as

Figure 20-1 Universe Industries has two divisions: the Haley Division and the Comet Division. Information about a component that the Haley Division produces is as follows: The Haley Division can produce up to 5,000 components per year. The Comet Division needs 200 units of the component for a product it manufactures. -Refer to Figure 20-1. The maximum transfer price that the Comet Division would be willing to pay is

Figure 20-3 The Adam Division produces a component that is used by the West Division. The cost of manufacturing the component is as follows: ^aBased on a practical volume of 250,000 components Other costs incurred by the Adam Division are as follows: The component usually sells for £90 in the external market. The Adam Division is capable of producing 250,000 components per year; however, only 200,000 components are expected to be sold next year. The variable selling expenses are avoidable if the component is sold internally. The West Division has been buying the same component from an external supplier for £80 each. The West Division expects to use 40,000 units of the component next year. The manager of the West Division has offered to buy 40,000 units from the Adam Division for £56 each. -Refer to Figure 20-3. The maximum transfer price that the West Division would be willing to pay is

A transfer pricing system should satisfy which of the following objectives?

Figure 20-3 The Adam Division produces a component that is used by the West Division. The cost of manufacturing the component is as follows: ^aBased on a practical volume of 250,000 components Other costs incurred by the Adam Division are as follows: The component usually sells for £90 in the external market. The Adam Division is capable of producing 250,000 components per year; however, only 200,000 components are expected to be sold next year. The variable selling expenses are avoidable if the component is sold internally. The West Division has been buying the same component from an external supplier for £80 each. The West Division expects to use 40,000 units of the component next year. The manager of the West Division has offered to buy 40,000 units from the Adam Division for £56 each. -Refer to Figure 20-3. The effect on firmwide income if 40,000 components are transferred internally at £56 each instead of purchased from an external supplier at £80 per unit would be a

Which of the following types of transfer prices do NOT encourage the selling division to be efficient?