Deck 15: Transfer Pricing

Question 1

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

Answer 1

True

Question 2

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.

Answer 2

True

Question 3

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

Answer 3

False

Question 4

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 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

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

Question 10

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 11

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

Question 12

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

Question 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

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 18

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

Question 19

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

Question 20

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

Question 21

You have been provided with the following information for Division X of a decentralized company:
$$\begin{array} { l r } \text { Selling price } & \$ 90\\\text { Variable cost per unit } & 66 \\\text { Fixed cost per unit } & 20 \\\text { Sales volume (units) } & 22,500 \\\text { Capacity (units) } & 25,000\end{array}$$
Division Y of the same company would like to purchase all of its units internally. Division Y needs 6,000 units each period and currently pays $84 per unit to an outside firm. What is the lowest price that Division X could accept from Division Y? (Assume that Division Y wants to use a sole supplier and will not purchase less than 6,000 from a supplier.)

A) $90.
B) $84.
C) $80.
D) $66.

Question 22

Dockside Enterprises Incorporated operates two divisions: (1) a management division that owns and manages bulk carriers on the Great Lakes and (2) a repair division that operates a dry dock in Tampa, Florida. The repair division works on company ships and outside large-hull ships. The repair division has an estimated variable cost of $37 per labor-hour, has a backlog of work for outside ships, and charges $70.00 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 $45.00 per hour, including leasing an adequate work area.

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

A) $33.00.
B) $37.00.
C) $45.00.
D) $70.00.

Question 23

Transfer prices are used for all of the following except:

A) decision making.
B) product costing.
C) performance evaluation.
D) generation of overall organization profit.

Question 24

The Wheel Division of Frankov Corporation has the capacity for making 75,000 wheel sets per year and regularly sells 60,000 each year on the outside market. The regular sales price is $100 per wheel set, and the variable production cost per unit is $65. The Retail Division of Frankov Corporation currently buys 30,000 wheel sets (of the kind made by the Wheel Division) yearly from an outside supplier at a price of $90 per wheel set. If the Retail Division were to buy the 30,000 wheel sets it needs annually from the Wheel Division at a transfer price of $87 per wheel set, the change in annual net operating income for the company as a whole would be:

A) $600,000.
B) $225,000.
C) $750,000.
D) $135,000.

Question 25

Part 43X costs the Southern Division of Norris Corporation $26 to produce. Making up that cost are direct materials of $10, direct labor of $4, variable manufacturing overhead of $9, and fixed manufacturing overhead of $3. Southern Division sells Part 43X to other companies for $30. The Northern Division of Norris Corporation can use Part 43X in one of its products. The Southern Division has enough idle capacity to produce all of the units of Part 43X that the Northern Division would require. What is the lowest transfer price at which the Southern Division should be willing to sell Part 43X to the Northern Division?

A) $30.
B) $26.
C) $23.
D) $27.

Question 26

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?

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

Question 27

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?

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

Question 28

Division B has variable manufacturing costs of $50 per unit and fixed costs of $10 per unit. Assuming that 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.

Question 29

Division A has variable manufacturing costs of $50 per unit and fixed costs of $10 per unit. Assuming that 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.

Question 30

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 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 of these are false.
D) Neither of these is false.

Question 31

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 32

Dockside Enterprises Incorporated operates two divisions: (1) a management division that owns and manages bulk carriers on the Great Lakes and (2) a repair division that operates a dry dock in Tampa, Florida. The repair division works on company ships and outside large-hull ships. The repair division has an estimated variable cost of $37 per labor-hour, has a backlog of work for outside ships, and charges $70.00 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 $45.00 per hour, including leasing an adequate work area.

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

A) $33.00.
B) $37.00.
C) $45.00.
D) $70.00.

Question 33

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 34

When the selling division in an internal transfer has unsatisfied demand from outside customers for the product that is being transferred, the lowest acceptable transfer price for the selling division is:

A) the variable cost of producing a unit of product.
B) the full absorption cost of producing a unit of product.
C) the market price charged to outside customers, less costs saved by transferring internally.
D) the amount that the purchasing division would have to pay an outside seller to acquire a similar product for its use.

Question 35

Division X makes a part that it sells to customers outside of the company. Data concerning this part appear below:
$$\begin{array} { l r r } \text { Selling price to outside customers } & \$ 50 \\\text { Variable cost per unit } & \$ 30 \\\text { Total fixed costs } & \$ 400,000 \\\text { Capacity in units } & 25,000\end{array}$$
Division Y of the same company would like to use the part manufactured by Division X in one of its products. Division Y currently purchases a similar part made by an outside company for $49 per unit and would substitute the part made by Division X. Division Y requires 5,000 units of the part each period. Division X has ample excess capacity to handle all of Division Y's needs without any increase in fixed costs and without impacting outside sales. What is the lowest acceptable transfer price from the standpoint of the selling division?

A) $50.
B) $49.
C) $46.
D) $30.

Question 36

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 37

The Raisin Division of Trail Mix Foods, Incorporated had the following operating results last year:
$$\begin{array} { l r } \text { Sales } ( 150,000 \text { pounds of raisins) } & \$ 60,000 \\\text { Variable expenses } & 37,500 \\\text { Contribution margin } & 22,500 \\\text { Fixed expenses } & 12,000 \\\text { Profit } & \$ 10,500 \\\end{array}$$
Raisin expects identical operating results this year.

- The Raisin Division has the ability to produce and sell 200,000 pounds of raisins annually.
Assume that the Peanut Division of Trail Mix Foods wants to purchase an additional 20,000 pounds of raisins from the Raisin Division. Raisin will be able to increase its profit by accepting any transfer price above:

A) $0.25 per pound.
B) $0.08 per pound.
C) $0.15 per pound.
D) $0.40 per pound.

Question 38

Division A makes a part that it sells to customers outside of the company. Data concerning this part appear below:
$$\begin{array} { l r r } \text { Selling price to outside customers } & \$ 40 \\\text { Variable cost per unit } & \$ 30 \\\text { Total fixed costs } & \$ 10,000 \\\text { Capacity in units } & 20,000\end{array}$$
Division B of the same company would like to use the part manufactured by Division A in one of its products. Division B currently purchases a similar part made by an outside company for $38 per unit and would substitute the part made by Division A. Division B requires 5,000 units of the part each period. Division A has ample capacity to produce the units for Division B without any increase in fixed costs and without impacting sales to outside customers. If Division A sells to Division B, the variable cost per unit would be $1 lower than when selling to outside customers. What should be the lowest acceptable transfer price from the perspective of Division A?

A) $40.
B) $38.
C) $30.
D) $29.

Question 39

Dockside Enterprises Incorporated operates two divisions: (1) a management division that owns and manages bulk carriers on the Great Lakes and (2) a repair division that operates a dry dock in Tampa, Florida. The repair division works on company ships and outside large-hull ships. The repair division has an estimated variable cost of $37 per labor-hour, has a backlog of work for outside ships, and charges $70.00 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 $45.00 per hour, including leasing an adequate work area.

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

A) $33.00.
B) $37.00.
C) $45.00.
D) $70.00.

Question 40

Division A makes a part that it sells to customers outside of the company. Data concerning this part appear below:
$$\begin{array} { l r r } \text { Selling price to outside customers } & \$ 75 \\\text { Variable cost per unit } & \$ 50 \\\text { Total fixed costs } & \$ 400,000 \\\text { Capacity in (units) } & 25,000\end{array}$$
Division B of the same company would like to use the part manufactured by Division A in one of its products. Division B currently purchases a similar part made by an outside company for $70 per unit and would substitute the part made by Division A. Division B requires 5,000 units of the part each period. Division A can already sell all of the units it can produce on the outside market. What should be the lowest acceptable transfer price from the perspective of Division A?

A) $75.
B) $66.
C) $16.
D) $50.

Question 41

The Pillar Division of the Gothic Building Company produces basic pillars which can be sold to outside customers or sold to the Lantern Division of the Gothic Company. The Lantern Division wants to purchase 25,000 pillars from the Pillar Division. The following data are available for last year's activities of the Pillar Division:
$$\begin{array} { ll} \text { Capacity in units } & 300,000 \text { pillars } \\\text { Selling price per pillar to outside customers } & \$ 1.75 \\\text { Variable costs per pillar } & \$ 0.90 \\\text { Fixed costs, total } & \$ 150,000\end{array}$$

The total fixed costs would be the same for all the alternatives considered.

-
Suppose the transfers of pillars to the Lantern Division would reduce sales to outside customers by 15,000 units. What is the lowest transfer price that would not reduce the profits of the Pillar Division?

A) $0.90.
B) $1.35.
C) $1.41.
D) $1.75.

Question 42

Division X of Operandi Corporation makes and sells a single product which is used by manufacturers of fork lift trucks. Currently, it sells 12,000 units per year to outside customers at $24 per unit. The annual capacity is 20,000 units and the variable costs to make each unit is $16. Division Y of Operandi Corporation would like to buy 10,000 units a year from Division X to use in its products. There would be no cost savings from transferring the units within the company rather than selling them on the outside market. What should be the lowest acceptable transfer price from the perspective of Division X?

A) $24.00.
B) $21.40.
C) $17.60.
D) $16.00.

Question 43

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 44

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. The following data are available for last year's activities in the Stake Division:
$$\begin{array} { l c c } \text { Capacity in units } & 400,000 \text { stakes } \\\text { Quantity sold to outside customers } & 350,000 \text { stakes } \\\text { Selling price per stake to outside customers } & \$ 3.00 \\\text { Total variable costs per stake } & \$ 2.00 \\\text { Fixed operating costs } & \$ 200,000\end{array}$$
In order to sell 50,000 stakes to the Solar Light Division, the Stake Division had to 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.

-
What is the lowest acceptable transfer price from the viewpoint of the selling division?

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

Question 45

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) only 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 46

Division A produces a part with the following characteristics:
$\begin{array}{lrr}\text { Capacity in units } & 50,000 \\\text { Selling price per unit } & \$ 30 \\\text { Variable costs per unit } & \$ 18 \\\text { Fixed costs per unit } & \$ 3\end{array}$
Division B, another division in the company, would like to buy this part from Division A. Division B is currently purchasing the part from an outside source at $28 per unit. If Division A sells to Division B, $1 in variable costs can be avoided.

-
Suppose that Division A has ample idle capacity to handle all of Division B's needs without any increase in fixed costs and without impacting sales to outside customers. From the point of view of Division A, any sales to Division B should be priced no lower than:

A) $29.
B) $30.
C) $18.
D) $17.

Question 47

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

A) outlay costs.
B) 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 48

An intermediate market is perfect when:

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 49

Division A of Chappelle Company has the capacity for making 3,000 motors per month and regularly sells 1,950 motors each month to outside customers at a contribution margin of $62 per motor. The variable cost per motor is $35.70. Division B of Chappelle Company would like to obtain 1,400 motors each month from Division A. What should be the lowest acceptable transfer price from the perspective of Division A?

A) $26.57.
B) $51.20.
C) $35.70.
D) $62.00.

Question 50

Division X makes a part that it sells to customers outside of the company. Data concerning this part appear below:
$$\begin{array} { ll } \text { Selling price to outside customers } & \$ 50 \\\text { Variable cost per unit } & \$30 \\\text { Total fixed costs } & \$ 400,000 \\\text { Capacity in units } & 25,000\end{array}$$
Division Y of the same company would like to use the part manufactured by Division X in one of its products. Division Y currently purchases a similar part made by an outside company for $49 per unit and would substitute the part made by Division X. Division Y requires 5,000 units of the part each period. Division X can sell all of the units it makes to outside customers. What is the lowest acceptable transfer price from the standpoint of the selling division?

A) $50.
B) $49.
C) $46.
D) $30.

Question 51

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 of these are true.
D) Neither of these is true.

Question 52

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. The following data are available for last year's activities in the Stake Division:
$$\begin{array} { l c c } \text { Capacity in units } & 400,000 \text { stakes } \\\text { Quartity sold to outside customers } & 350,000 \text { stakes } \\\text { Selling price per stake to outside customers } & \$ 3.00 \\\text { Total variable costs per stake } & \$ 2.00 \\\text { Fixed operating costs } & \$ 200,000\end{array}$$
In order to sell 50,000 stakes to the Solar Light Division, the Stake Division had to 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.

-
Suppose that last year an outside supplier would have been willing to provide the Solar Light Division with the basic stakes at $2.10 each. If the Solar Light Division had chosen to buy all of its stakes from the outside supplier instead of the Stake Division, the change in net operating income for the company as a whole would have been:

A) $45,000 increase.
B) $20,000 decrease.
C) $20,000 increase.
D) $25,000 increase.

Question 53

The Raisin Division of Trail Mix Foods, Incorporated had the following operating results last year:
$$\begin{array} { l r } \text { Sales } ( 150,000 \text { pounds of raisins) } & \$ 60,000 \\\text { Variable expenses } & 37,500 \\\text { Contribution margin } & 22,500 \\\text { Fixed expenses } & 12,000 \\\text { Profit } & \$ 10,500 \\\end{array}$$
Raisin expects identical operating results this year.

-
Assume that the Raisin Division is currently operating at its capacity of 150,000 pounds of raisins. Also assume that the Peanut Division wants to purchase an additional 20,000 pounds of raisins from the Raisin Division. Under these conditions, what amount per pound of raisins would the Raisin Division have to charge the Peanut Division in order to maintain its current profit?

A) $0.40 per pound.
B) $0.08 per pound.
C) $0.15 per pound.
D) $0.25 per pound.

Question 54

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 55

The Gear Division makes a part with the following characteristics:
$$\begin{array} { l l} \text { Production capacity } & 25,000 \text { units } \\\text { Selling price to outside customers } & \$ 18 \\\text { Variable cost per unit } & \$ 11 \\\text { Fixed cost, total } & \$ 100,000\end{array}$$
The Motor Division of the same company would like to purchase 10,000 units each period from the Gear Division. The Motor Division now purchases the part from an outside supplier at a price of $17 each.

-
Suppose the Gear Division has ample excess capacity to handle all of the Motor Division's needs without any increase in fixed costs and without impacting sales to outside customers. If the Gear Division refuses to accept the $17 price internally and the Motor Division continues to buy from the outside supplier, the company as a whole will be:

A) worse off by $70,000 each period.
B) better off by $10,000 each period.
C) worse off by $60,000 each period.
D) worse off by $20,000 each period.

Question 56

The Pillar Division of the Gothic Building Company produces basic pillars which can be sold to outside customers or sold to the Lantern Division of the Gothic Company. The Lantern Division wants to purchase 25,000 pillars from the Pillar Division. The following data are available for last year's activities of the Pillar Division:
$$\begin{array} { ll} \text { Capacity in units } & 300,000 \text { pillars } \\\text { Selling price per pillar to outside customers } & \$ 1.75 \\\text { Variable costs per pillar } & \$ 0.90 \\\text { Fixed costs, total } & \$ 150,000\end{array}$$
The total fixed costs would be the same for all the alternatives considered.

-
Suppose there is ample capacity so that transfers of the pillars to the Lantern Division do not impact sales to outside customers. What is the lowest transfer price that would not reduce the profits of the Pillar Division?

A) $0.90.
B) $1.35.
C) $1.41.
D) $1.75.

Question 57

The Pillar Division of the Gothic Building Company produces basic pillars which can be sold to outside customers or sold to the Lantern Division of the Gothic Company. The Lantern Division wants to buy 25,000 pillars from the Pillar Division. The following data are available for last year's activities of the Pillar Division:
$$\begin{array} { ll} \text { Capacity in units } & 300,000 \text { pillars } \\\text { Selling price per pillar to outside customers } & \$ 1.75 \\\text { Variable costs per pillar } & \$ 0.90 \\\text { Fixed costs, total } & \$ 150,000\end{array}$$

The total fixed costs would be the same for all the alternatives considered.

-
Suppose the transfers of pillars to the Lantern Division would reduce sales to outside customers by 15,000 units. Further suppose that an outside supplier is willing to provide the Lantern Division with basic pillars at $1.45 each. If the Lantern Division had chosen to buy all of its pillars from the outside supplier instead of the Pillar Division, the change in net operating income for the company as a whole would have been:

A) $1,250 decrease.
B) $10,250 increase.
C) $1,000 decrease.
D) $13,750 decrease.

Question 58

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 59

Division A produces a part with the following characteristics:
$\begin{array}{lrr}\text { Capacity in units } & 50,000 \\\text { Selling price per unit } & \$ 30 \\\text { Variable costs per unit } & \$ 18 \\\text { Fixed costs per unit } & \$ 3\end{array}$
Division B, another division in the company, would like to buy this part from Division A. Division B is currently purchasing the part from an outside source at $28 per unit. If Division A sells to Division B, $1 in variable costs can be avoided.

-
Suppose Division A is currently operating at capacity and can sell all of the units it produces on the outside market for its usual selling price. From the point of view of Division A, any sales to Division B should be priced no lower than:

A) $27.
B) $29.
C) $20.
D) $28.

Question 60

The Gear Division makes a part with the following characteristics:
$$\begin{array} { l l } \text { Production capacity } & 25,000 \text {units } \\\text { Selling price to outside customers } & \$ 18 \\\text { Variable cost per unit } & \$ 11 \\\text { Fixed cost, total } & \$ 100,000\end{array}$$
The Motor Division of the same company would like to purchase 10,000 units each period from the Gear Division. The Motor Division now purchases the part from an outside supplier at a price of $17 each.

-
Suppose that the Gear Division is operating at capacity and can sell all of its output to outside customers. If the Gear Division sells the parts to Motor Division at $17 per unit, the company as a whole will be:

A) better off by $10,000 each period.
B) worse off by $20,000 each period.
C) worse off by $10,000 each period.
D) There will be no change in the status of the company as a whole.

Question 61

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.

Question 62

Altoona Corporation has two divisions, Hinges and Doors, which are both organized as profit centers. The Hinge Division produces and sells hinges to the Door Division and to outside customers. The Hinge Division has total costs of $35, $20 of which are variable. The Hinge Division is operating significantly below capacity and sells the hinges for $50.
The Door Division has received an offer from an outsider vendor to supply all the hinges it needs (20,000 hinges) at a cost of $45. The manager of the Door Division is considering the offer but wants to approach the Hinge Division first.

-
What is the minimum transfer price from the Hinge Division to the Door Division?

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

Question 63

The optimal transfer price when there are intermediate markets and the seller is operating at capacity is normally the:

A) full cost.
B) outlay cost.
C) variable cost.
D) market price.

Question 64

Given the following data for Keyboard Division:
$$\begin{array} { ll} \text { Selling price to outside customers } & \$ 25 \\\text { Variable cost per unit } & \$ 12 \\\text { Total fixed cost } & \$ 50,000 \\\text { Capacity (in units) } & 125,000\end{array}$$
The Computer Division would like to purchase 15,000 units each period from the Keyboard Division. The Keyboard Division has ample excess capacity to handle all of the Computer Division's needs. The Computer Division now purchases from an outside supplier at a price of $20. If the Keyboard Division 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.

Question 65

Frocks and Gowns, Incorporated, 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 for the Collars 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 contribution margin for the Day Wear Division without the transfer to the Night Wear Division?

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

Question 66

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. The 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:

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

Question 67

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?

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

Question 68

Retro Rides, Incorporated, operates two divisions: (1) a Management Division that owns and manages classic automobile rentals in Miami, Florida and (2) a Repair Division that restores classic automobiles in Clearwater, Florida. The Repair Division works on classic motorcycles, as well as other classic automobiles.
The Repair Division has an estimated variable cost of $28.50 per labor-hour and has a backlog of work for automobile restoration. 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.

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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) $48.00.

Question 69

You have been provided with the following information for the Wool Division of a decentralized company:
$$\begin{array} { l l} \text { Selling price } & \$ 45 \\\text { Variable cost per unit } & \$ 33 \\\text { Fixed cost per unit } & \$ 12 \\\text { Sales volume (units) } & 22,500 \\\text { Capacity (units) } & 25,000\end{array}$$
The Blanket Division would like to purchase all of its units internally. The Blanket Division needs 6,000 units each period and currently pays $42 per unit to an outside firm. Assuming that the Blanket Division wants to use a sole supplier and will not purchase less than 6,000 from a supplier, what is the lowest price that Wool Division should accept from the Blanket Division?

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

Question 70

Altoona Corporation has two divisions, Hinges and Doors, which are both organized as profit centers. The Hinge Division produces and sells hinges to the Door Division and to outside customers. The Hinge Division has total costs of $35, $20 of which are variable. The Hinge Division is operating significantly below capacity and sells the hinges for $50.
The Door Division has received an offer from an outsider vendor to supply all the hinges it needs (20,000 hinges) at a cost of $45. The manager of the Door Division is considering the offer but wants to approach the Hinge Division first.

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What is the maximum transfer price that the Door Division would accept from the Hinge Division?

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

Question 71

Given the following data for Handle Division:
$$\begin{array} { l r } \text { Selling price to outside customers } &\$ 150 \\\text { Variable cost per unit } & 80 \\\text { Fixed cost per unit (based on capacity) } & 30 \\\text { Capacity (in units) } & 50,000\end{array}$$
The Cabinet Division would like to purchase 10,000 units from the Handle Division at a price of $125 per unit. Handle Division has no excess capacity to handle the Cabinet Division's requirements. The Cabinet Division currently purchases from an outside supplier at a price of $140. If the Handle Division 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 72

Altoona Corporation has two divisions, Hinges and Doors, which are both organized as profit centers. The Hinge Division produces and sells hinges to the Door Division and to outside customers. The Hinge Division has total costs per unit of $35, $20 of which are variable. The Hinge Division is operating significantly below capacity and sells the hinges for $50.
The Door Division has received an offer from an outsider vendor to supply all the hinges it needs (20,000 hinges) at a cost of $45. The manager of the Door Division is considering the offer but wants to approach the Hinge Division first.
What would be the profit impact to Altoona Corporation as a whole if the Door Division purchased the 20,000 hinges it needs from the outside vendor for $45?

A) No change in profit to Altoona.
B) $100,000 increase in profits.
C) $100,000 decrease in profits.
D) $500,000 decrease in profits.

Question 73

Given the following data for Electrical Cord Division:
$$\begin{array} { l r } \text { Selling price to outside customers } & \$40 \\\text { Variable cost per unit } & 30 \\\text { Total fixed cost } & 10,000 \\\text { Capacity (in units) } & 2,000\end{array}$$
Assume that the Electrical Cord Division is selling all it can produce to outside customers. If it sells to the Appliance Division, $1 can be avoided in variable cost per unit. The Appliance Division 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 the Appliance Division should be priced at:

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

Question 74

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 75

The Lock Division of Morgantown Corporation 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 agrees to sell to the Cabinet Division at the outside supplier's price and the Cabinet Division continues to buy inside?

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 76

Frocks and Gowns, Incorporated, 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 for the Collars 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.

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

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

Question 77

Retro Rides, Incorporated, operates two divisions: (1) a Management Division that owns and manages classic automobile rentals in Miami, Florida and (2) a Repair Division that restores classic automobiles in Clearwater, Florida. The Repair Division works on classic motorcycles, as well as other classic automobiles.
The Repair Division has an estimated variable cost of $28.50 per labor-hour and has a backlog of work for automobile restoration. 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.

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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.

Question 78

Retro Rides, Incorporated, operates two divisions: (1) a Management Division that owns and manages classic automobile rentals in Miami, Florida and (2) a Repair Division that restores classic automobiles in Clearwater, Florida. The Repair Division works on classic motorcycles, as well as other classic automobiles.
The Repair Division has an estimated variable cost of $28.50 per labor-hour and has a backlog of work for automobile restoration. 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.

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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.

Question 79

Lock Division of Morgantown Corporation 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 refuses to sell at the outside supplier's price and the Cabinet Division decides to buy outside?

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 80

Frocks and Gowns, Incorporated, 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 for the Collars 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.

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

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