Deck 15: Transfer Pricing

Question 1

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

Answer 1

True

Question 2

The GAAP financial reporting rules for segments require that all companies use transfer prices based on market prices.

Answer 2

False

Question 3

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

Answer 3

True

Question 4

Transfer prices are not used to record the exchange between two cost centers within the same organization.

Question 5

A transfer made at cost does not motivate the selling division to transfer its goods or services internally.

Question 6

A selling division at capacity is indifferent between selling to outsiders and transferring inside at the market price.

Question 7

In the United States,more companies use cost-based transfer prices than market-based transfer prices.

Question 8

Transfer prices cannot be used for decision making,product costing,or performance evaluation.

Question 9

In general,the optimal transfer price for a division is the sum of its outlay costs and the opportunity cost of not transferring its goods to another division.

Question 10

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

Question 11

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.

Question 12

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.

Question 13

A transfer price is the value assigned to the transfer of goods or services between divisions within the same organization.

Question 14

If a transfer has no effect on divisional profit,risk-neutral managers will be indifferent between making the transfer or not.

Question 15

A perfect intermediate market exists if buyers can buy and sellers can sell outside of the organization.

Question 16

A market price-based transfer price policy allows the selling division to determine the price for transfers between divisions within the same organization.

Question 17

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.

Question 18

An organization that has significant foreign operations must disclose how its transfer prices are established between domestic and foreign divisions.

Question 19

The use of an optimal transfer price eliminates potential conflicts between an organization's interests and the divisional manager's interest.

Question 20

From an organization's viewpoint,transfer prices have no effect on total profits assuming the transfer occurs between the two responsibility centers.

Question 21

The general principle on setting transfer prices that are in the organization's best interests is:

A)outlay cost plus opportunity cost of the resource at the point of transfer.
B)variable costs plus opportunity cost of the resource at the point of transfer.
C)lost contribution margin less the allocated fixed costs for the selling division.
D)gross margin for the buying division plus the gross margin for the selling division.

Question 22

Some managers prefer to use cost rather than market price in controlling transfers between divisions.If cost is to be used,then it should be

A)full cost.
B)direct cost.
C)variable cost.
D)standard cost.
E)absorption cost.

Question 23

The transfer price that should be used by top management in evaluating whether a division should buy within the company or from an outside supplier is

A)negotiated transfer price.
B)transfer price based on full cost.
C)transfer price based on variable cost.
D)transfer price based on an open market price.

Question 24

Multinational firms often face conflicting pressures when developing transfer pricing policies.Tax avoidance results when

A)inflated transfer prices are used to reduce the profits of divisions in high tax-rate countries.
B)inflated transfer prices are used to reduce the profits of divisions in low tax-rate countries.
C)cost-based transfer prices are used instead of market transfer prices in high tax-rate countries.
D)cost-based transfer prices are used instead of negotiated market transfer prices in low tax-rate countries.

Question 25

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.

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 26

Which of the following is not an appropriate use of transfer pricing?

A)product costing
B)decision making
C)establishing standards
D)evaluating performance

Question 27

In general,if a potential transfer has no effect on divisional profits,

A)no transfer will take place between the divisions.
B)managers will be indifferent between making the transfer or not.
C)the organization should not intervene to force a transfer.
D)the optimal transfer price is the opportunity cost for the buying division.

Question 28

Top management intervention in settling transfer pricing disputes between two divisions should be avoided unless

A)there is no intermediate markets.
B)the intermediate market is imperfect.
C)there is an extraordinarily large order.
D)there is no opportunity costs.

Question 29

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

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 30

Which of the following transfer pricing methods must be used in segment reporting by the oil and gas industry?

A)Absorption cost.
B)Differential cost.
C)Negotiated market price.
D)Market price.

Question 31

Cost-based transfer prices that include a normal markup to the costs act as a surrogate for

A)negotiated market prices.
B)opportunity costs.
C)differential costs.
D)market prices.

Question 32

Which of the following responsibility centers is affected by the use of market-based transfer prices?

A)cost center.
B)profit center.
C)revenue center.
D)production center.

Question 33

The optimal transfer price when there are intermediate markets is

A)full cost.
B)outlay costs.
C)variable cost.
D)market prices.
E)negotiated market prices.

Question 34

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

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 35

Transfer prices would not be used by

A)production centers.
B)investment centers.
C)profit centers.
D)cost centers.

Question 36

A division can sell externally for $40 per unit.Its variable manufacturing costs are $15 per unit,and its variable marketing costs are $6 per unit.What is the opportunity cost of transferring internally,assuming the division is operating at capacity?

A)$15
B)$19
C)$21
D)$25

Question 37

When there is no intermediate market,

A)there is no optimal transfer price.
B)the selling division cannot transfer its goods internally.
C)the buying division cannot purchase its goods externally.
D)there is no reason for top management to intervene in transfer pricing disputes.

Question 38

Which of the following statements is (are)false? (A)From an organization's viewpoint,transfer prices have no effect on total profits assuming the transfer occurs between the two responsibility centers.
(B)A transfer price is the value assigned to the transfer of goods or services between divisions within the same organization.

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

Question 39

If the selling division has excess capacity,the transfer price should be set at its

A)differential outlay costs.
B)differential outlay costs plus the foregone contribution to the organization of making the transfer internally.
C)selling price less the variable costs.
D)selling price less the variable costs plus the foregone contribution to the organization of making the transfer internally.

Question 40

An intermediate market is perfect when

A)there is no quality differences between inside and outside suppliers.
B)there is no 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 41

A company is highly centralized.Division X,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.Division Y would like to purchase this component from Division X.The price that Division X should charge Division Y per unit for this component is

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

Question 42

What is the maximum transfer price per hour that the management division should pay?

A)$28.50
B)$30.00
C)$39.00
D)$46.50
E)$48.00

Question 43

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?

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 44

What is the minimum transfer price per hour that the repair division should obtain for its services,assuming it is operating at capacity?

A)$28.50
B)$30.00
C)$39.00
D)$46.50
E)$48.00

Question 45

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

A)$30,000.
B)$75,000.
C)$90,000.
D)$120,000.
E)$195,000.

Question 46

What is the contribution margin for Division A if it transfers 25,000 units to Division B at $6.75 per unit?

A)$250,000
B)$650,000
C)$675,000
D)$698,750

Question 47

What is the minimum transfer price from Division A to Division B?

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

Question 48

You have been provided with the following information for Division X of a decentralized company: Division W would like to purchase all of its units internally.Division W needs 6,000 units each period and currently pays $42 per unit to an outside firm.What is the lowest price that Division X could accept from Division W? Assume that Division W wants to use a sole supplier and will not purchase less than 6,000 from a supplier.

A)$45.
B)$42.
C)$40.
D)$38.
E)$33.

Question 49

If the repair division had idle capacity,what is the minimum transfer price that the repair division should obtain?

A)$28.50
B)$30.00
C)$39.00
D)$46.50
E)$48.00

Question 50

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?

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 51

What would be the profit impact to Avery Corporation as a whole if Division B purchased the 20,000 widgets it needs from the outside vendor for $45?

A)no change in profit to Avery
B)$100,000 increase in profits
C)$100,000 decrease in profits
D)$500,000 decrease in profits

Question 52

Division A has variable manufacturing costs of $25 per unit and fixed costs of $5 per unit.Division A is operating at capacity,what is the opportunity cost of an internal transfer when the market price is $35?

A)$5
B)$10
C)$25
D)$30
E)$35

Question 53

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

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

Question 54

What is the contribution margin for Division A without the transfer to Division B?

A)$250,000
B)$650,000
C)$675,000
D)$1,000,000

Question 55

What is the maximum transfer price from Division A to Division B?

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

Question 56

Given the following data for Division A: Assume that Division A is selling all it can produce to outside customers.If it sells to Division B,$1 can be avoided in variable cost per unit.Division B is presently purchasing from an outside supplier at $38 per unit.From the point of view of the company as a whole,any sales to Division B should be priced at

A)$40.
B)$39.
C)$38.
D)$37.
E)The company would not want the transfer to take place.

Question 57

Given the following data for Division L: Division N would like to purchase 10,000 units from Division L at a price of $125 per unit.Division L has no excess capacity to handle Division N's requirements.Division N currently purchases from an outside supplier at a price of $140.If Division L accepts a $125 price internally,the company,as a whole,will be better or worse off by

A)$600,000
B)($100,000)
C)$115,000
D)$250,000

Question 58

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.If Acme uses a negotiated transfer pricing system,what is the maximum transfer price that should be charged for this transaction?

A)$40
B)$36
C)$32
D)$22

Question 59

What is the minimum transfer price for the 25,000 unit order that Division A would accept if it wishes to maintain its pre-order contribution?

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

Question 60

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.If Acme uses a negotiated transfer pricing system,what is the minimum transfer price that should be charged for this transaction?

A)$40
B)$36
C)$32
D)$22

Question 61

If Cohasset would like to develop a range of transfer prices,what would be the maximum transfer price that Ironwood would be willing to pay?

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

Question 62

An appropriate transfer price between two divisions of The Stark Company can be determined from the following data: (CIA adapted) What is the natural bargaining range for the two divisions?

A)Between $20 and $50
B)Between $50 and $70
C)Any amount less than $50
D)$50 is the only acceptable transfer price

Question 63

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

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 64

If Cohasset would like to develop a range of transfer prices,what would be the minimum transfer price that Hurley would be willing to accept?

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

Question 65

A company has two divisions,A and B,each operated as a profit center.Division A charges Division B $35 per unit (for each unit transferred to Division B).Other data for Division A are as follows: Division A is planning to raise its transfer price to $50 per unit.Division B can purchase units at $40 per unit from outsiders,but doing so would idle Division A's facilities (now committed to producing units for Division B),Division A cannot increase its sales to outsiders.From the perspective of the company as a whole,from who should Division B acquire the units,assuming Division B's market is unaffected?

A)Outside vendors.
B)Division A,but only at the variable cost per unit.
C)Division A,but only until fixed costs are covered,then should purchase from outside vendors.
D)Division A,in spite of the increased transfer price.

Question 66

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

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

Question 67

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

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 68

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?

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

Question 69

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

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

Question 70

A per-unit transfer price from the Video Cards Division to the Entertainment Division at full cost,$9.15,would

A)allow evaluation of both divisions on a competitive basis.
B)satisfy the Video Cards Division's profit desire by allowing recovery of opportunity costs.
C)provide no profit incentive for the Video Cards Division to control or reduce costs.
D)encourage the Entertainment Division to purchase video cards from an outside source.

Question 71

Assume that the Entertainment Division is able to purchase a large quantity of video cards from an outside source at $8.70 per unit.The Video Cards Division,having excess capacity,agrees to lower its transfer price to $8.70 per unit.This action would

A)optimize the profit goals of the Entertainment Division while subverting the profit goals of Parkside Inc.
B)allow evaluation of both divisions on the same basis.
C)subvert the profit goals of the Video Cards Division while optimizing the profit goals of the Entertainment Division.
D)optimize the overall profit goals of Parkside Inc.

Question 72

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

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 73

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

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

Question 74

A large manufacturing company has several autonomous divisions that sell their products in perfectly competitive external markets as well as internally to the other divisions of the company.Top management expects each of its divisional managers to take actions that will maximize the organization's goal as well as their own goals.Top management also promotes a sustained level of management effort of all of its divisional managers.Under these circumstances,for products exchanged between divisions,the transfer price that will generally lead to optimal decisions for the manufacturing company would be a transfer price equal to the (CIA adapted)

A)full cost of the product.
B)full cost of the product plus a markup.
C)variable cost of the product plus a markup.
D)market price of the product.

Question 75

Division B has variable manufacturing costs of $50 per unit and fixed costs of $10 per unit.Division B is operating significantly below capacity,what is the opportunity cost of an internal transfer when the market price is $75?

A)$0
B)$25
C)$50
D)$60
E)$75

Question 76

Given the following information for Division K: Division L would like to purchase internally from Division K.Division L now purchases 5,000 units each period from outside suppliers at $49 per unit.Division K has ample excess capacity to handle all of Division L's needs.What is the lowest price that Division K could accept?

A)$50.00
B)$49.00
C)$46.00
D)$39.50
E)$30.00

Question 77

The Eastern division sells goods internally to the Western division of the same company.The quoted external price in industry publications from a supplier near Eastern is $200 per ton plus transportation.It costs $20 per ton to transport the goods to Western.Eastern's actual market cost per ton to buy the direct materials to make the transferred product is $100.Actual per-ton direct labor is $50.Other actual costs of storage and handling are $40.The company president selects a $220 transfer price.This is an example of (CIA adapted)

A)market-based transfer pricing.
B)cost-based transfer pricing.
C)negotiated transfer pricing.
D)cost plus 20% transfer pricing.

Question 78

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 opportunity cost of transferring internally,assuming the division is operating at capacity?

A)$13
B)$25
C)$35
D)$47

Question 79

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

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

Question 80

What is the cost impact to Cohasset as a whole of purchasing from R & M Steel? (CMA adapted)

A)increase the handle unit cost by $.05.
B)increase the handle unit cost by $.15.
C)decrease the handle unit cost by $.15.
D)decrease the handle unit cost by $.25.
E)decrease the handle unit cost by $.05.