Deck 20: Transfer Pricing in Divisionalized Companies

Question 1

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

A) £120.
B) £70.
C) £50.
D) £30.

Answer 1

A

Question 2

If it is available, the correct transfer price is

A) the market price from a perfectly competitive market.
B) the negotiated transfer price.
C) the variable production costs of the firm.
D) none of the above.

Answer 2

A

Question 3

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

A) the opportunity cost of the firm as a whole.
B) the opportunity cost of the selling division.
C) the opportunity cost of the buying division.
D) none of the above.

Answer 3

B

Question 4

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

A) accurate performance evaluation
B) goal congruence
C) preservation of divisional autonomy
D) all of the above

Question 5

A selling division produces components for a buying division that is considering accepting a special order for the products it produces. The selling division has excess capacity. The minimum price the selling division would be willing to accept is

A) the selling division's variable costs.
B) the buying division's outside purchase price.
C) the price that would allow the buying division to cover its incremental cost of the special order.
D) the price that would allow the selling division to maintain its current ROI.

Question 6

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

A) the opportunity cost of the firm as a whole.
B) the opportunity cost of the selling division.
C) the opportunity cost of the buying division.
D) none of the above.

Question 7

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

A) £120.
B) £110.
C) £100.
D) £40.

Question 8

In a negotiated transfer price,

A) market prices may not be suitable.
B) opportunity costs could be used to set boundaries.
C) buyers and sellers influence the transfer price set.
D) All of the above are true.

Question 9

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:
When an outside market exists for an intermediate product that is perfectly competitive, the ideal method of transfer pricing is often:

A) market price.
B) the one that creates the highest margin to the selling unit.
C) one that is higher than what the outside market is quoting.
D) based on management accounting numbers.

Question 10

A selling division produces components for a buying division that is considering accepting a special order for the products it produces. The selling division has excess capacity. The maximum price the buying division would be willing to accept is

A) the selling division's variable costs.
B) the buying division's outside purchase price.
C) the price that would allow the buying division to cover its incremental cost of the special order.
D) the price that would allow the selling division to maintain its current ROI.

Question 11

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

A) market price.
B) production cost pricing.
C) variable cost pricing.
D) cost plus markup pricing.

Question 12

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. If the selling division did NOT have excess capacity, the minimum transfer price the selling division would be willing to accept is

A) £120.
B) £75.
C) £50.
D) £30.

Question 13

____ is when the transfer price is computed equal to a sales price received by the reseller less an appropriate markup.

A) Advance pricing agreement
B) Comparable uncontrolled price approach
C) Cost-plus approach
D) Resale price method

Question 14

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

A) transfer prices based upon market prices
B) transfer prices based upon actual costs
C) transfer prices based upon standard costs
D) transfer prices based upon standard costs plus a markup for profit

Question 15

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:

A) multiple cost centres are conducting business within the company.
B) a decentralized company has profit centres or investment centres.
C) the return on investment ratio cannot be computed.
D) a company is transferring goods to the government.

Question 16

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 minimum transfer price that the Haley Division would be willing to accept is

A) £120.
B) £70.
C) £50.
D) £30.

Question 17

The optimal transfer price from the viewpoint of the company is

A) variable cost.
B) absorption cost plus markup.
C) variable cost plus opportunity cost.
D) absorption cost plus selling expenses.

Question 18

Negotiated prices transfer prices are:

A) determined between a division and corporate headquarters.
B) negotiated with external customers.
C) used when supplying and buying divisions independently agree on a price.
D) agreed to by division management and unions.

Question 19

Which of the following is a legitimate disadvantage of negotiated transfer pricing?

A) Negotiated based transfer pricing fails to provide adequate autonomy to divisional managers.
B) Negotiated based transfer prices will always be higher than market price.
C) Negotiated based transfer prices usually fail to allow the seller to cover variable costs.
D) Negotiated prices may lead to some less than optimal decisions.

Question 20

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 all that it produces for £100 each. The Melton Division needs 100 units. What is the correct transfer price?

A) £120
B) £110
C) £100
D) £60

Question 21

Figure 20-8
Pautner Company had the following historical accounting data per unit: The units are normally transferred internally from Division A to Division B. The units also may be sold externally for £210 per unit. The minimum profit level accepted by the company is a markup of 30 per cent. There were no beginning or ending inventories.
Refer to Figure 20-8. What would be the transfer price if Division X uses full cost plus markup?

A) £167.70
B) £198.90
C) £136.50
D) £129.00

Question 22

Figure 20-9
Miggs 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 42 per cent; in the United States, the corporate income tax rate is 35 per cent.
The market price of the component is £200 and the Belgium plant's costs to manufacture the component are as follows:
Refer to Figure 20-9. What is the maximum transfer price that the U.S. division would be willing to pay?

A) £70
B) £110
C) £120
D) £200

Question 23

Figure 20-8
Pautner Company had the following historical accounting data per unit: The units are normally transferred internally from Division A to Division B. The units also may be sold externally for £210 per unit. The minimum profit level accepted by the company is a markup of 30 per cent. There were no beginning or ending inventories.
Refer to Figure 20-8. If variable manufacturing costs without a fixed fee are used as the transfer price, Division A's transfer price would be

A) £60.
B) £90.
C) £105.
D) £144.

Question 24

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. Assume the Jones Division can sell 4,000 units at £420. Any excess capacity will be unused unless the units are purchased by the Thomas Division, which could use up to 200 units. The minimum transfer price that the Jones Division would be willing to accept would be

A) £400.
B) £200.
C) £420.
D) £360.

Question 25

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 minimum transfer price that the Adam Division would accept is

A) £60.
B) £50.
C) £48.
D) £30.

Question 26

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

A) £50.
B) £80.
C) £130.
D) £180.

Question 27

Figure 20-9
Miggs 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 42 per cent; in the United States, the corporate income tax rate is 35 per cent.
The market price of the component is £200 and the Belgium plant's costs to manufacture the component are as follows:
Refer to Figure 20-9. What is the minimum transfer price that the Belgium division would be willing to accept?

A) £70
B) £110
C) £120
D) £200

Question 28

Figure 20-4
The Simonds Division produces a component that is used by the Allen Division. The cost of manufacturing the component is as follows: ^aBased on a practical volume of 400,000 components
Other costs incurred by the Simonds Division are as follows: The component usually sells for £35 in the external market. The Simonds Division is capable of producing 500,000 components per year; however, only 400,000 components are expected to be sold next year. The variable selling expenses are avoidable if the component is sold internally.
The Allen Division has been buying the same component from an external supplier for £34 each. The Allen Division expects to use 50,000 units of the component next year. The manager of the Allen Division has offered to buy 50,000 units from the Simonds Division for £22.50 each.
Refer to Figure 20-4. The effect on firmwide income if 50,000 components are transferred internally at £22.50 each instead of purchased from an external supplier at £34 per unit would be a

A) £700,000 increase.
B) £700,000 decrease.
C) £575,000 increase.
D) £575,000 decrease.

Question 29

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

A) £1,920,000 decrease.
B) £1,280,000 increase.
C) £960,000 decrease.
D) £960,000 increase.

Question 30

Figure 20-4
The Simonds Division produces a component that is used by the Allen Division. The cost of manufacturing the component is as follows: ^aBased on a practical volume of 400,000 components
Other costs incurred by the Simonds Division are as follows: The component usually sells for £35 in the external market. The Simonds Division is capable of producing 500,000 components per year; however, only 400,000 components are expected to be sold next year. The variable selling expenses are avoidable if the component is sold internally.
The Allen Division has been buying the same component from an external supplier for £34 each. The Allen Division expects to use 50,000 units of the component next year. The manager of the Allen Division has offered to buy 50,000 units from the Simonds Division for £22.50 each.
Refer to Figure 20-4. The minimum transfer price that the Simonds Division would accept is

A) £25.
B) £21.
C) £20.
D) £16.

Question 31

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 minimum transfer price that the Bradley Division would be willing to accept is

A) £50.
B) £80.
C) £130.
D) £180.

Question 32

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. The engine department has excess capacity. What is the best transfer price to avoid transfer price problems?

A) £1,350
B) £300
C) £900
D) £2,100

Question 33

Figure 20-9
Miggs 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 42 per cent; in the United States, the corporate income tax rate is 35 per cent.
The market price of the component is £200 and the Belgium plant's costs to manufacture the component are as follows:
Refer to Figure 20-9. Which transfer price would be in the best interest of the overall company?

A) £70
B) £110
C) £120
D) £200

Question 34

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. Assume the Jones Division can sell 4,000 units at £420. Any excess capacity will be unused unless the units are purchased by the Thomas Division, which could use up to 200 units. The maximum transfer price that the Thomas Division would be willing to pay would be

A) £400.
B) £200.
C) £420.
D) £360.

Question 35

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) £90.
B) £60.
C) £48.
D) £38.

Question 36

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. If the selling division did NOT have excess capacity, the minimum transfer price the selling division would be willing to accept would be

A) £50.
B) £80.
C) £130.
D) £180.

Question 37

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 maximum transfer price that the Melton Division would be willing to pay would be

A) £120.
B) £110.
C) £100.
D) £60.

Question 38

Figure 20-4
The Simonds Division produces a component that is used by the Allen Division. The cost of manufacturing the component is as follows: ^aBased on a practical volume of 400,000 components
Other costs incurred by the Simonds Division are as follows: The component usually sells for £35 in the external market. The Simonds Division is capable of producing 500,000 components per year; however, only 400,000 components are expected to be sold next year. The variable selling expenses are avoidable if the component is sold internally.
The Allen Division has been buying the same component from an external supplier for £34 each. The Allen Division expects to use 50,000 units of the component next year. The manager of the Allen Division has offered to buy 50,000 units from the Simonds Division for £22.50 each.
Refer to Figure 20-4. The maximum transfer price that the Allen Division would be willing to pay is

A) £20.00.
B) £25.00.
C) £26.50.
D) £34.00.

Question 39

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?

A) £400
B) £200
C) £420
D) £360

Question 40

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?

A) £2,730
B) £600
C) £1,800
D) £2,100

Question 41

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 minimum transfer price that the Belgium division would be willing to accept?

A) £280
B) £148
C) £136
D) £92

Question 42

If the divisions exchanging goods are located in different countries with different tax rate structures, the key determinant of transfer prices could be based largely on:

A) variable costs.
B) negotiations.
C) market prices.
D) tax minimization strategy.

Question 43

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?

A) £78.00
B) £60.00
C) £84.50
D) £52.00

Question 44

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

A) cost-based
B) market-based
C) negotiated
D) all of the above

Question 45

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.

Question 46

Bernie Manufacturing Company has two divisions, X and Y. Division X prepares the steel for processing. Division Y processes the steel into the final product. No inventories exist in either division at the beginning or end of 2011. During the year, Division X prepared 80,000 kgs. of steel at a cost of £800,000. All the steel was transferred to Division Y where additional operating costs of £5 per kg. were incurred. The final product was sold for £3,000,000.
Required:
a.
Determine the gross profit for each division and for the company as a whole if the transfer price is £8 per kg.
b.
Determine the gross profit for each division and for the company as a whole if the transfer price is £12 per kg.

Question 47

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

Question 48

Conner Manufacturing has one plant located in Italy and another plant located in the United States. The Italian plant manufactures a component used in a finished product manufactured at the U.S. plant. Currently, the Italian plant is operating at 75 per cent capacity. In Italy, the income tax rate is 32 per cent; in the United States, the corporate income tax rate is 35 per cent. The market price of the component is £240 and the Italian plant's costs to manufacture the component are as follows: Which transfer price would be in the best interest of the overall company?

A) £120
B) £100
C) £150
D) £240

Question 49

Brown Industries has two divisions: the Hank Division and the Murray Division. Information about a component that the Hank Division produces is as follows: The Hank Division can produce up to 22,000 components per year. The Murray Division needs 1,000 units of the component for a product it manufactures.
Required:
a.
Determine the minimum transfer price that the selling division would be willing to accept.
b.
Determine the maximum transfer price that the buying division would be willing to pay.
c.
If the Hank Division did not have excess capacity, what would be the correct transfer price?

Question 50

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?

A) £280
B) £148
C) £136
D) £92