Deck 15: Transfer Pricing

Question 1

Which of the following is not true about effective management control?

A)Closely aligned with organization's goals.
B)Closely aligned with organization's strategies.
C)Management control systems reinforce goals.
D)Designed to support organizational responsibilities of individual managers.
E)Effective management control systems do not motivate managers and other employees.

Answer 1

E

Question 2

Which of the following is not true about the formal management control system?

A)Includes procedures.
B)Includes explicit rules.
C)Includes shared values.
D)Includes incentive plans.
E)Includes performance measures.

Answer 2

C

Question 3

Which of the following is an organizational structure that gives managers at lower levels the freedom to make decisions?

A)Profit.
B)Revenue.
C)Autonomy.
D)Centralization.
E)Decentralization.

Answer 3

E

Question 4

Which of the following is the extent to which managers strive or endeavor to achieve a goal?

A)Effort.
B)Esteem.
C)Development.
D)Determination.
E)Goal congruence.

Question 5

A means of gathering and using information to aid and coordinate planning and control decisions throughout an organization and to guide behavior of its managers and other employees is called ________.

A)ability
B)determination
C)goal congruence
D)procedure development
E)management control system

Question 6

How can the employee or manager's effort go beyond physical exertion?

Question 7

Which of the following is not a benefit of decentralization?

A)Creates greater responsiveness to the needs of a subunit's customers,suppliers,and employees.
B)Leads to gains from faster decision making by subunit managers.
C)Increases motivation of subunit managers.
D)Lacks the ability to help management development learning in organizations.
E)Sharpens the focus of subunit managers,broadens the reach of top management.

Question 8

How do managers use information to design management control systems?

Question 9

The manager is accountable for cost only in which of the following responsibility centers?

A)Cost Center.
B)Clinic Center.
C)Profit Center.
D)Revenue Center.
E)Investment Center.

Question 10

Which of the following is true about the informal management control system?

A)Includes procedures.
B)Includes explicit rules.
C)Includes incentive plans.
D)Includes company culture.
E)Includes performance measures.

Question 11

The manager is accountable for revenues only in which of the following responsibility centers?

A)Cost Center.
B)Clinic Center.
C)Profit Center.
D)Revenue Center.
E)Investment Center.

Question 12

________ exists when individuals and groups work toward achieving the organization's goals.

A)Esteem
B)Ability
C)Motivation
D)Determination
E)Goal congruence

Question 13

Which of the following is not an advocate's opinion about the cost of decentralization?

A)Leads to optimal decision making.
B)Leads to suboptimal decision making.
C)Focus of manager's attention on the subunit rather than the company as a whole.
D)Results in duplication of output.
E)Results in duplication of activities.

Question 14

Can a manager directly reward and observe effort?

Question 15

Which of the following refers to the degree of freedom to make decisions?

A)Profit.
B)Revenue.
C)Autonomy.
D)Centralization.
E)Decentralization.

Question 16

Which of the following is an organizational structure in which power is concentrated at the top and there is relatively little freedom for managers at the lower levels to make decisions?

A)Profit.
B)Revenue.
C)Autonomy.
D)Centralization.
E)Decentralization.

Question 17

Effective management control systems should also motivate managers and other employees.

Question 18

Management control systems do not need to fit an organization's structure.

Question 19

________ is the desire to attain a selected goal combined with resulting pursuit of that goal.

A)Esteem
B)Ability
C)Motivation
D)Determination
E)Achievements

Question 20

Some companies design their management control system around the concept of the balanced scorecard.

Question 21

Centralization slows decision making because responsibility for decisions creeps upward through layer after layer of management.

Question 22

The manager is accountable for investments,revenues and costs in which of the following responsibility centers?

A)Cost Center.
B)Clinic Center.
C)Profit Center.
D)Revenue Center.
E)Investment Center.

Question 23

Profit centers can be coupled with a highly centralized organization,and cost centers can be coupled with a highly decentralized organization,

Question 24

With a well-designed transfer price,each divisional manager makes the best decision for his or her subunit,while simultaneously ________ the profits of the firm.

A)prohibiting
B)eliminating
C)maximizing
D)minimizing
E)distributing

Question 25

In a well-designed transfer-pricing system,a manager focuses on minimizing subunit performance.

Question 26

What is the rationale of transfer prices?

Question 27

The manager is accountable for revenues and costs in which of the following responsibility centers?

A)Cost Center.
B)Clinic Center.
C)Profit Center.
D)Revenue Center.
E)Investment Center.

Question 28

In centralized organizations,much of the decision-making power resides in the individual subunits.

Question 29

When subunits work together,top management uses ________ to coordinate the actions of the subunits and to evaluate the performance of their managers.

A)transfer prices
B)single unit cost
C)dual pricing
D)multiple unit costs
E)hybrid pricing

Question 30

Surveys of U.S.and European companies report that the decisions made most frequently at the decentralized level are related to product mix and product advertising.

Question 31

Which of the following is the price one subunit charges for a product or service supplied to another subunit of the same organization?

A)Unit cost.
B)Turn price.
C)Trade price.
D)Transfer price.
E)Recording price.

Question 32

Which of the following is the product or service transferred between subunits of an organization?

A)Unit product.
B)Internal product.
C)External product.
D)Subordinate product.
E)Intermediate product.

Question 33

Which of the following is not considered criteria used by managers to evaluate transfer prices?

A)Promotes goal congruence.
B)Induces managers to exert a high level of effort.
C)Helps top management evaluate the performance of individual subunits.
D)Preserves a high degree of subunit autonomy in decision making if top management favors a high degree of decentralization.
E)Subunits selling a product of service should not be motivated to hold down their costs.

Question 34

Why are multinational companies often decentralized?

Question 35

Job rotation combined with decentralization helps develop the ability of managers to operate in the global environment.

Question 36

Which of the following is not true about transfer prices?

A)Creates costs for the selling subunit.
B)Creates revenue for the selling subunit.
C)Affects each subunit's operating income.
D)Operating incomes used to evaluate subunits' performance.
E)Operating incomes are not used to motivate managers.

Question 37

Which of the following is not true about subunits in decentralized organizations?

A)Decision-making power resides in individual subunits.
B)Decision-making power resides in multiple subunits.
C)Subunits interact by supplying goods to one another.
D)Subunits interact by supplying services to one another.
E)When subunits work together,top management uses transfer prices to coordinate the actions of the subunits.

Question 38

How can managers use information technology to enhance decentralized decision making in multinational corporations?

Question 39

________ ease the subunit managers' information-processing and decision-making tasks.

A)Unit costs
B)Turn prices
C)Trade prices
D)Transfer prices
E)Recording prices

Question 40

Decentralization speeds decision making,creating a competitive advantage over centralized organizations.

Question 41

The cost used in cost-based transfer prices can only be the actual cost.

Question 42

Vitamin D Dairy has two divisions,Distribution and Production.The company's primary product is milk.Each division's costs are provided below:

The Distribution Division has been operating at a capacity of 4,500,000 gallons a week and usually purchases 2,250,000 gallons from the Production Division and 2,250,000 gallons from other suppliers at $1.00 per gallon.
Required
What is the transfer price per gallon from the Production Division to the Distribution Division,assuming the method used to place a value on each gallon of milk is 170% of variable costs? Next,compute the transfer price per gallon from the Production Division to the Distribution Division,assuming the method used to place a value on each gallon of milk is 130% of full costs.
Assume 150,000 gallons are transferred from the Production Division to the Distribution Division for a transfer price of $0.85 per gallon.The Distribution Division sells the 150,000 gallons at a price of $1.20 each to customers.What is the operating income of both divisions together?

Question 43

Which of the cost scenarios listed below would managers choose to use when they do not consider full costs in cost-based transfer methods?

A)R&D.
B)Payroll.
C)Distribution.
D)Design marketing.
E)Customer service.

Question 44

Which of the following is not an outcome of market-based transfer prices in perfectly competitive markets?

A)Promote goal congruence.
B)Motivate management effort.
C)Evaluate subunit performance.
D)Preserve subunit autonomy.
E)Eliminate goal congruence.

Question 45

Temporary drops in market prices below historical averages when an industry has excess capacity are:

A)market prices.
B)distress prices.
C)dangling prices.
D)installed prices.
E)maximum prices.

Question 46

Choose the appropriate transfer-price method ideal to managers when they expense variable production costs,variable and fixed production costs,and full product costs.

A)Market-based transfer prices.
B)Cost-based transfer prices.
C)Hybrid transfer prices.
D)Segment-based transfer prices.
E)Demographic-based transfer prices.

Question 47

Under imperfect competition,the transfer price should be set at a suitable ________ to the external price in order to induce the manager of the buying division to seek internal transfers.

A)tax
B)surtax
C)coupon
D)discount
E)surcharge

Question 48

In competitive markets,it is efficient to set the transfer prices ________ to the market price of the intermediate goods.

A)equal
B)below
C)above
D)separate
E)different

Question 49

________ products or services at market prices generally lead to optimal decisions when the market for the intermediated product is perfectly competitive.

A)Creating
B)Evaluating
C)Comparing
D)Determining
E)Transferring

Question 50

Which of the following is not true about hybrid transfer prices?

A)Hybrid transfer prices take into account both cost and market information.
B)Top management may administer prices by specifying a transfer price that is an average of the cost of producing and transporting the product internally.
C)The most common form of hybrid price arises via negotiation.
D)Information regarding costs and prices plays a critical role in this bargaining process.
E)Managers never negotiate transfer prices because they will show as a loss of profits.

Question 51

Scuba Tank Company manufactures only one type of oxygen tank;and,it has two divisions,the Compressor Division,and the Assembly Division.The Compressor Division manufactures compressors for the Assembly Division,which completes the oxygen tanks and sells it to retailers.The Compressor Division "sells" compressors to the Assembly Division.The market price for the Assembly Division to purchase a compressor is $41.50.(Ignore changes in inventory. )The fixed costs for the Compressor Division are assumed to be the same over the range of 6,000-9,000 units.The fixed costs for the Assembly Division are assumed to be $8.00 per unit at 9,000 units.

Required
Compute the transfer price per compressor from the Compressor Division to the Assembly Division if the method used to place a value on each compressor is 160% of variable costs.Compute the transfer price per compressor from the Compressor Division to the Assembly Division if the transfer price per compressor is 125% of full costs.Next,assume the transfer price for a compressor is 135% of total costs of the Compressor Division and 1,250 of the compressors are produced and transferred to the Assembly Division,and compute the Compressor Division's operating income.Compute the operating income of the Compressor Division and the Assembly Division if the Assembly Division sells 1,250 oxygen tanks at a price of $395.50 per oxygen tank.

A)$40.00;$48.50;$16,000.00;$112,025.50
B)$42.00;$48.60;$16,500.00;$112,500.60
C)$44.00;$48.75;$16,750.00;$112,750.70
D)$48.00;$48.90;$17,015.50;$113,025.50
E)$50.00;$49.06;$17,175.00;$114,062.50

Question 52

Review the transfer-price methods listed below and choose the best transfer-price method ideal to managers when prices of products and services listed in trade association Web sites are competitive.

A)Market-based transfer prices.
B)Cost-based transfer prices.
C)Hybrid transfer prices.
D)Segment-based transfer prices.
E)Demographic-based transfer prices.

Question 53

The managerial accountant at Mega Petroleum reported the following information.Recall that the contract price of $75 per barrel of crude oil is based on market price in Chicago.The market price per barrel of crude oil supplied to the refining division is $90.The managerial accountant reported the following information.The market price per barrel of gasoline sold to external parties is $180.

Required
Compute Mega Petroleum's total operating income from purchasing,transporting,and refining 100 barrels of crude oil and selling the 50 barrels of gasoline.

A)$50
B)$65
C)$75
D)$95
E)$100

Question 54

Which of the following methods includes a markup,or profit margin,that represents a return on subunit investment?

A)Market-based transfer prices.
B)Cost-based transfer prices.
C)Hybrid transfer prices.
D)Segment-based transfer prices.
E)Demographic-based transfer prices.

Question 55

Which of the following exists when there is a homogeneous product with buying prices equal to selling prices and no individual buyers or sellers can affect those prices by their own actions?

A)Simple competitive market.
B)Double competitive market.
C)Complex competitive market.
D)Uniquely competitive market.
E)Perfectly competitive market.

Question 56

Gravel and Sand Corporation has two divisions,Refining and Production.The company's primary product is Quick-dry Cement Mix.Each division's costs are provided below:

The Refining Division has been operating at a capacity of 42,000 bags a day and usually purchases 25,750 from the Production Division and 16,250 bags of cement mix from other suppliers at $62 per bag.
Required
Based on the provided information,what is the transfer price per bag from the Production Division to the Refining Division,assuming the method used to place a value on each bag of cement mix is 190% of variable costs? Compute the transfer price per bag from the Production Division to the Refining Division,assuming the method used to place a value on each bag of cement mix is 115% of full costs.Assume 230 bags are transformed from the Production Division to the Refining Division for a transfer price of $20 per bag.The Refining Division sells the 230 bags at a price of $105 each to customers.What is the operating income of both divisions together?

A)$20.90;$20.70;$6,670
B)$21.90;$21.70;$6,675
C)$21.95;$21.75;$6,670
D)$22.05;$21.80;$6,675
E)$22.10;$21.85;$6,680

Question 57

The most common form of hybrid price arises via negotiation-the subunit managers are asked to negotiate the transfer price between them and to decide whether to transact internally,or deal with external parties.

Question 58

How do managers reduce excessive focus of subunit managers on their own subunits?

Question 59

What is the focus of managers in a well-designed transfer-pricing system?

Question 60

Mega Petroleum has two divisions,each operating as a profit center.The transportation division purchases crude oil in Venezuela,and transports it from Venezuela to Chicago,Illinois.The reefing division process crude oil into gasoline.The cost-based transfer price is 106% of full cost.The contract price of $75 per barrel of crude oil is based on market price in Chicago.The market price per barrel of crude oil supplied to the refining division is $90.The managerial accountant reported the following information?

Required
Compute the cost-based transfer prices at 106% of full cost of the crude oil purchased in Venezuela,plus the transportation division's variable and fixed costs.

A)$80.86
B)$82.86
C)$85.86
D)$87.86
E)$90.86

Question 61

If markets are not perfectly competitive,selling prices do not affect the quantity of products sold.

Question 62

Deciding whether a current market price is a distress price is often difficult.

Question 63

When a market for the intermediate goods is imperfectly competitive,how does a manager set the transfer price?

Question 64

Is there a risk of suboptimal decisions when transfer prices are based on full cost plus a markup? Why?

Question 65

When supply outstrips demand,market prices may drop well below their historical averages.

Question 66

Which of the following is not an issue a manager raises about full-cost transfer pricing?

A)How are each subunit's indirect costs allocated to products?
B)Have the correct activities bases been identified?
C)Have the correct cost pools been identified?
D)Have the correct cost-allocation bases been identified?
E)Have we considered that the current market price is a distress price?

Question 67

Which of the following is not true about the negotiated pricing method?

A)Negotiated pricing is the most common hybrid method.
B)Under this method,top management does not administer a specific split of the eventual profits across the transacting divisions.
C)The eventual transfer price result from a bargaining process between the selling and buying subunits.
D)Divisions are not free to negotiate a price that is mutually acceptable to both.
E)Price and cost information are usually the starting point in the negotiation process.

Question 68

The imperfect competition is illustrated in a downward-sloping curve for the ________ product.

A)end
B)normal
C)primary
D)beginning
E)intermediate

Question 69

Which of the following is not true about cost-based transfer prices?

A)Prices are helpful to managers when market prices are unavailable.
B)Prices are helpful to managers when market prices are inappropriate.
C)Prices are helpful to managers when the product is specialized.
D)Prices are helpful to managers when the internal product is similar from the products available externally.
E)Prices are helpful to managers when the external product is different from the products available externally.

Question 70

The managerial accountant at Bottles for Less makes internal transfers at 175% of full cost.The Refining Division purchases 25,000 containers per day,on average,from a local supplier,who delivers the containers through an external shipper.
To determine if they can reduce costs,the company located an independent supplier in Virginia who is willing to sell 25,000 containers at $20 each,delivered to the Shipping Division in Wyoming.The company in Wyoming can ship the 25,000 containers at a variable cost of $2.50 per container.
Required
Compute the full cost to the company if it purchases the containers from the independent supplier.

A)$200,000
B)$250,000
C)$300,000
D)$450,000
E)$500,000

Question 71

In practice,many companies use transfer prices based on ________.

A)semi-cost
B)full-cost
C)part-cost
D)half-cost
E)partial-cost

Question 72

Cost-based transfer prices are helpful in each of the following except:

A)when market prices are available.
B)when market prices are unavailable.
C)when market prices are inappropriate.
D)when markets are not perfectly competitive.
E)when internal products are different from the products available externally in terms of quality and customer service.

Question 73

What method do most companies use to compute the transfer price?

Question 74

The managerial accountant at the Snowboard Factory reported that the company makes internal transfers at 150% of full cost.The Wood Refining Division purchases 35,000 slabs of wood per day,on average,from a local supplier,who delivers wood for $50 per slab via an external shipper.To reduce costs,the company located an independent supplier in Utah who is willing to sell 35,000 slabs of wood at a variable cost of $4.25 per slab.
Required
Compute the full cost of purchasing the wood from the Utah supplier and shipping it to the Wood Refining Division.

A)$1,525,000
B)$1,600,350
C)$1,625,950
D)$1,898,750
E)$1,925,460

Question 75

To approximate market prices,cost-based transfer prices are sometimes set at full cost plus a margin.

Question 76

In the ________ method,the eventual transfer price results from a bargaining process between the selling and buying subunits.

A)negotiated pricing
B)negotiated buying
C)negotiated purchasing
D)negotiated distribution
E)negotiated parallelism

Question 77

Under the ________ method,top management does not administer a specific split of the eventual profits across the transacting decisions.

A)negotiated pricing
B)negotiated buying
C)negotiated purchasing
D)negotiated distribution
E)negotiated parallelism

Question 78

How does a manager know which transfer price to judge performance if distress prices prevail in the short-run versus the long-run?

Question 79

Cost-based transfer prices are not useful when the internal product is different from the products available externally in terms of quality and customer service.

Question 80

Transfer prices based on full cost can lead to ________.

A)no decisions
B)optimal decisions
C)primary decisions
D)contingent decisions
E)suboptimal decisions