Deck 21: Transfer Pricing and Multinational Management Control Systems

Question 1

The degree of freedom to make decisions is known as decentralization.

Answer 1

False

Question 2

An important advantage of decentralized operations is that it improves corporate control.

Answer 2

False

Question 3

A management control system should have all of the following characteristics,EXCEPT

A)it should motivate employees.
B)it should be closely aligned to organizational goals and objectives.
C)it should provide information for individual managers for decision making.
D)it should motivate managers.
E)it should always focus on customer satisfaction.

Answer 3

E

Question 4

A benefit of decentralization should be increased motivation of subunit managers.

Question 5

Management control systems collect which type of data?

A)financial
B)non-financial
C)data from outside of the company
D)financial and non-financial
E)financial and non-financial,including data from both within the company and outside of the company

Question 6

A management control system would include both formal as well as informal control mechanisms.

Question 7

The essence of decentralization is the freedom for managers at lower levels of the organization to make decisions.

Question 8

A decentralized organizational structure may result in duplication of activities.

Question 9

Management control systems reflect only financial data.

Question 10

Motivation is the desire to attain a selected goal combined with the resulting drive or pursuit toward that goal.

Question 11

A well-designed management control system obtains all of its information from within the company.

Question 12

A management control system is a means of gathering and using information to aid and coordinate the process of making planning and control decisions throughout the organization,and to guide employee behaviour.

Question 13

Subunit managers are better informed about their suppliers than top management is.

Question 14

Suboptimal decision making is also called congruent decision making.

Question 15

Goal congruence occurs when managers act in their own best interest at the expense of the organization.

Question 16

Management control systems motivate managers and other employees to exert effort through a variety of rewards tied to the achievement of goals.

Question 17

One benefit of centralization is an increase in development of an experienced pool of management talent to fill higher-level management positions.

Question 18

Effort in terms of management control systems is defined in terms of physical exertion such as a worker producing at a faster rate.

Question 19

The goal of a management control system is to improve the collective decisions in an organization in an economically feasible way.

Question 20

An informal management control systems includes specific rules,procedures,and performance measures.

Question 21

The choice of a transfer-pricing method has minimal effect on the allocation of company-wide operating income among divisions.

Question 22

Negotiated transfer prices are always transacted at the top management levels.

Question 23

Examples of market-based transfer prices include variable manufacturing costs,full manufacturing costs,and full product costs.

Question 24

Provide a complete definition of a management control system.

Question 25

The president of Silicon Company has just returned from a week of professional development courses and is very excited that she will not have to change the organization from a centralized structure to a decentralized structure just to have responsibility centres.However,she is somewhat confused about how responsibility centres relate to centralized organizations where a few managers have most of the authority.
Required: Explain how a centralized organization might allow for responsibility centres.

Question 26

Which of the following statements is FALSE?

A)A centralized structure does not empower employees to handle customer complaints directly.
B)A decentralized structure forces top management to lose some control over the organization.
C)Decentralization slows responsiveness to local needs for decision making.
D)The extent to which decisions are pushed downward,and the types of decisions that are pushed down,provide a measure of the level of centralization/decentralization in an organization.
E)Decentralization can increase motivation by allowing managers to exercise greater individual initiative.

Question 27

The costs,as opposed to benefits,of decentralization include all of the following,except

A)management development and learning.
B)duplication of output.
C)increased costs of information-gathering.
D)focus of manager's attention on the subunit rather than the company as a whole.
E)suboptimal decision making.

Question 28

Physical exertion and mental action towards a goal can best be described as

A)motivation.
B)effort.
C)goal congruence.
D)incentive.
E)loyalty.

Question 29

Which of the following is NOT a responsibility centre within an organization,whether centralized or decentralized?

A)cost centre
B)profit centre
C)revenue centre
D)savings centre
E)investment centre

Question 30

Market price is the only price that a firm should use when transferring goods from one subunit to another subunit.

Question 31

Products transferred between subunits within an organization are considered intermediate products.

Question 32

Department A charges Department B $1,350 for copying services provided.The $1,350 is considered a transfer price.

Question 33

Informal management control systems include

A)incentive plans.
B)codes of conduct.
C)qualitative measures of performance.
D)policies.
E)company culture.

Question 34

What is the purpose of the internal control system within an organization?

Question 35

An advantage of decentralization is that it

A)creates greater responsiveness to local needs.
B)focuses manager's attention on the organization as a whole.
C)does not result in a duplication of activities.
D)reduces the cost of gathering information.
E)leads to decision making consistent with company goals.

Question 36

Discuss some of the recent legislation and frameworks relating to assurance and internal controls.

Question 37

The degree of freedom to make decisions is

A)decentralization.
B)autonomy.
C)centralization.
D)motivation.
E)goal congruence.

Question 38

Which of the following is FALSE concerning profit centres and cost centres?

A)A profit centre can exist within a centralized organization.
B)A profit centre can exist within a decentralized organization.
C)A cost centre can exist within a centralized organization.
D)A cost centre can exist within a decentralized organization.
E)If a profit centre exists within a centralized organization,there cannot be any cost centres in the organization.

Question 39

All of the following are benefits of decentralization EXCEPT

A)it creates greater responsiveness to local needs.
B)it decreases management and worker morale.
C)it leads to quicker decision making.
D)it sharpens the focus of managers.
E)it leads to better supplier relationships.

Question 40

Discuss the possible problems a corporation might have if its operations are totally decentralized.

Question 41

A transfer pricing method should lead to which of the following results?

A)managers always acting in their own best interest
B)managers acting in their own best interest and their decisions being in the long-term best interest of the manager's subunit
C)managers acting in their own best interest and their decisions being in the long-term best interest of the company
D)managers not acting in their own best interest and their decisions being in the best interest of the company
E)managers competing with each other so that they become more efficient

Question 42

Market-based transfer prices are generally accepted by tax authorities because they represent arm's length prices.

Question 43

Use the information below to answer the following question(s).
Bon Accord uses two divisions in the production of soybean burgers.Division A sells soybean paste internally to Division B,which,in turn,produces soybean burgers that sell for $5 per kilogram.Division A incurs costs of $0.75 per kilogram,while Division B incurs additional costs of $2.50 per kilogram.
What is Division A's operating income per kilogram assuming the transfer price of the soybean paste is set at $1.25 per kilogram?

A)$0.500
B)$0.875
C)$1.250
D)$1.625
E)$1.525

Question 44

Answer the following question(s)using the information below:
Greenlawn Ltd.has two divisions,Distribution and Production.The company's primary product is fertilizer.Each division's costs are provided below:
The Distribution Division has been operating at a capacity of 4,000,000 kilograms a week and usually purchases 2,000,000 kilograms from the Production Division and 2,000,000 kilograms from other suppliers at $0.45 per kilogram.
What is the transfer price per kilogram from the Production Division to the Distribution Division,assuming the method used to place a value on each kilogram of fertilizer is 160% of variable costs?

A)$0.05
B)$0.11
C)$0.08
D)$0.40
E)$0.48

Question 45

Use the information below to answer the following question(s).
Blackoil Corp.has two divisions,Refining and Production.The company's primary product is Clean Oil.Each division's costs are provided below:
The Production Division is able to sell the oil to other areas for $24 per litre.The Refining Division has been operating at a capacity of 80,000 litres a day,using oil from the Production Division and oil purchased from other suppliers.The Refining Division usually purchases 50,000 litres of oil,on average,from the Production Division and 30,000 litres,on average,from other suppliers at $40/litre.
What is the transfer price per litre from the Production Division to the Refining Division assuming the method is 120% of full costs?

A)$16.80
B)$12.00
C)$9.50
D)$7.20
E)$12.50

Question 46

Use the information below to answer the following question(s).
Blackoil Corp.has two divisions,Refining and Production.The company's primary product is Clean Oil.Each division's costs are provided below:
The Production Division is able to sell the oil to other areas for $24 per litre.The Refining Division has been operating at a capacity of 80,000 litres a day,using oil from the Production Division and oil purchased from other suppliers.The Refining Division usually purchases 50,000 litres of oil,on average,from the Production Division and 30,000 litres,on average,from other suppliers at $40/litre.
What is the transfer price per litre assuming the method used is 175% of variable costs?

A)$10.50
B)$12.00
C)$17.50
D)$24.50
E)$12.50

Question 47

All of the following criteria may be used to choose a transfer-pricing method EXCEPT

A)promotion of quality products.
B)promotion of a sustained high level of management effort.
C)promotion of a high level of subunit autonomy.
D)promotion of goal congruence.
E)help top management evaluate subunit performance.

Question 48

No matter how low the transfer price,the manager of the selling division should sell the division's product to other company divisions in the interests of overall company profitability.

Question 49

Subunits X and Y determined the price for interdepartmental services during the last monthly meeting,using the selling prices charged to outside parties.This is an example of

A)subunit transfer prices.
B)negotiated transfer prices.
C)market-based transfer prices.
D)cost-based transfer prices.
E)multinational transfer pricing.

Question 50

The Canada Revenue Agency has adopted International Financial Reporting Standards as the framework for transfer pricing regulations.

Question 51

Use the information below to answer the following question(s).
Bon Accord uses two divisions in the production of soybean burgers.Division A sells soybean paste internally to Division B,which,in turn,produces soybean burgers that sell for $5 per kilogram.Division A incurs costs of $0.75 per kilogram,while Division B incurs additional costs of $2.50 per kilogram.
What is Division B's operating income per kilogram assuming the transfer price of the soybean paste is set at $1.25 per kilogram?

A)$0.500
B)$0.875
C)$1.250
D)$1.625
E)$1.525

Question 52

Answer the following question(s)using the information below:
Greenlawn Ltd.has two divisions,Distribution and Production.The company's primary product is fertilizer.Each division's costs are provided below:
The Distribution Division has been operating at a capacity of 4,000,000 kilograms a week and usually purchases 2,000,000 kilograms from the Production Division and 2,000,000 kilograms from other suppliers at $0.45 per kilogram.
What is the transfer price per kilogram from the Production Division to the Distribution Division,assuming the method used to place a value on each kilogram of fertilizer is 120% of full costs?

A)$0.30
B)$0.36
C)$0.45
D)$0.55
E)$0.42

Question 53

Use the information below to answer the following question(s).
Blackoil Corp.has two divisions,Refining and Production.The company's primary product is Clean Oil.Each division's costs are provided below:
The Production Division is able to sell the oil to other areas for $24 per litre.The Refining Division has been operating at a capacity of 80,000 litres a day,using oil from the Production Division and oil purchased from other suppliers.The Refining Division usually purchases 50,000 litres of oil,on average,from the Production Division and 30,000 litres,on average,from other suppliers at $40/litre.
What is the Refining Division's operating income if 150 litres of oil are sold at $110 /litre and 200 litres are transferred in? Assume the transfer price is based on 175% of variable costs.

A)$16,500
B)$15,600
C)$525
D)$6,825
E)$8,500

Question 54

Use the information below to answer the following question(s).
Bon Accord uses two divisions in the production of soybean burgers.Division A sells soybean paste internally to Division B,which,in turn,produces soybean burgers that sell for $5 per kilogram.Division A incurs costs of $0.75 per kilogram,while Division B incurs additional costs of $2.50 per kilogram.
What is Bon Accord's operating income per kilogram?

A)$1.75
B)$1.25
C)$0.50
D)$0
E)$2.00

Question 55

Companies may approach tax authorities to obtain an Advanced Transfer Price Arrangement to ascertain if a proposed transfer pricing arrangement is acceptable.

Question 56

The price one subunit of an organization charges for a product or service supplied to another subunit of the same organization is called

A)an interdepartmental product price.
B)an intermediate product price.
C)a subunit price.
D)a transfer price.
E)a fixed price.

Question 57

Use the information below to answer the following question(s).
Blackoil Corp.has two divisions,Refining and Production.The company's primary product is Clean Oil.Each division's costs are provided below:
The Production Division is able to sell the oil to other areas for $24 per litre.The Refining Division has been operating at a capacity of 80,000 litres a day,using oil from the Production Division and oil purchased from other suppliers.The Refining Division usually purchases 50,000 litres of oil,on average,from the Production Division and 30,000 litres,on average,from other suppliers at $40/litre.
What is the Production Division's operating income per 200 litres of oil reported under the 175% of variable costs method?

A)$1,500
B)$880
C)$100
D)$(100)
E)$1,200

Question 58

Use the information below to answer the following question(s).
Blackoil Corp.has two divisions,Refining and Production.The company's primary product is Clean Oil.Each division's costs are provided below:
The Production Division is able to sell the oil to other areas for $24 per litre.The Refining Division has been operating at a capacity of 80,000 litres a day,using oil from the Production Division and oil purchased from other suppliers.The Refining Division usually purchases 50,000 litres of oil,on average,from the Production Division and 30,000 litres,on average,from other suppliers at $40/litre.
What is the transfer price per litre from production to refining if the market price method of pricing is used?

A)$24
B)$32
C)$36
D)$40
E)$38

Question 59

A product is know as ________ when it is transferred from one subunit to another subunit in the same organization.

A)an interdepartmental product.
B)an intermediate product.
C)a subunit product.
D)a transfer product.
E)a secondary product.

Question 60

All of the following are general methods for determining transfer prices EXCEPT

A)cost-based transfer prices.
B)market-based transfer prices.
C)negotiated transfer prices.
D)taxation policies.
E)multi-national transfer prices.

Question 61

Answer the following question(s)using the information below.
Beta Shoe Ltd.manufactures only one type of shoe and has two divisions,the Sole Division,and the Assembly Division.The Sole Division manufactures soles for the Assembly Division,which completes the shoe and sells it to retailers.The Sole Division "sells" soles to the Assembly Division.The market price for the Assembly Division to purchase a pair of soles is $20.(Ignore changes in inventory. )The fixed costs for the Sole Division are assumed to be the same over the range of 40,000-100,000 units.The fixed costs for the Assembly Division are assumed to be $7 per pair at 100,000 units.
Sole's costs per pair of soles are:
Assembly's costs per completed pair of shoes are:

If the Assembly Division sells 100,000 pairs of shoes at a price of $60 a pair to customers,what is the company's operating income?

A)$4,400,000
B)$3,400,000
C)$3,000,000
D)$2,600,000
E)$2,400,000

Question 62

Answer the following question(s)using the information below.
Beta Shoe Ltd.manufactures only one type of shoe and has two divisions,the Sole Division,and the Assembly Division.The Sole Division manufactures soles for the Assembly Division,which completes the shoe and sells it to retailers.The Sole Division "sells" soles to the Assembly Division.The market price for the Assembly Division to purchase a pair of soles is $20.(Ignore changes in inventory. )The fixed costs for the Sole Division are assumed to be the same over the range of 40,000-100,000 units.The fixed costs for the Assembly Division are assumed to be $7 per pair at 100,000 units.
Sole's costs per pair of soles are:
Assembly's costs per completed pair of shoes are:

Assume the transfer price for a pair of soles is 180% of total costs of the Sole Division and 40,000 of soles are produced and transferred to the Assembly Division.The Sole Division's operating income is

A)$320,000.
B)$360,000.
C)$248,000.
D)$440,000.
E)$400,000.

Question 63

The Mill Flow Company has two divisions.The Cutting Division prepares timber at its sawmills.The Assembly Division prepares the cut lumber into finished wood for the furniture industry.No inventories exist in either division at the beginning of the year.During the year,the Cutting Division prepared 60,000 cords of wood at a cost of $660,000.All the lumber was transferred to the Assembly Division,where additional operating costs of $6 per cord were incurred.The 60,000 cords of finished wood were sold for $2,500,000.
Required:
a.Determine the operating income for each division if the transfer price from Cutting to Assembly is at cost.
b.Determine the operating income for each division if the transfer price is $9 per cord.
c.Since the Cutting Division sells all of its wood internally to the Assembly Division,does the manager care what price is selected? Why? Should the Cutting Division be a cost centre or a profit centre under the circumstances?

Question 64

Answer the following question(s)using the information below.
Beta Shoe Ltd.manufactures only one type of shoe and has two divisions,the Sole Division,and the Assembly Division.The Sole Division manufactures soles for the Assembly Division,which completes the shoe and sells it to retailers.The Sole Division "sells" soles to the Assembly Division.The market price for the Assembly Division to purchase a pair of soles is $20.(Ignore changes in inventory. )The fixed costs for the Sole Division are assumed to be the same over the range of 40,000-100,000 units.The fixed costs for the Assembly Division are assumed to be $7 per pair at 100,000 units.
Sole's costs per pair of soles are:
Assembly's costs per completed pair of shoes are:

What is the transfer price per pair of soles from the Sole Division to the Assembly Division if the method used to place a value on each pair of soles is 180% of variable costs?

A)$14.40
B)$12.60
C)$16.20
D)$28.80
E)$32.40

Question 65

Answer the following question(s)using the information below.
Beta Shoe Ltd.manufactures only one type of shoe and has two divisions,the Sole Division,and the Assembly Division.The Sole Division manufactures soles for the Assembly Division,which completes the shoe and sells it to retailers.The Sole Division "sells" soles to the Assembly Division.The market price for the Assembly Division to purchase a pair of soles is $20.(Ignore changes in inventory. )The fixed costs for the Sole Division are assumed to be the same over the range of 40,000-100,000 units.The fixed costs for the Assembly Division are assumed to be $7 per pair at 100,000 units.
Sole's costs per pair of soles are:
Assembly's costs per completed pair of shoes are:

What is the transfer price per pair of shoes from the Sole Division to the Assembly Division if the transfer price per pair of soles is 125% of full costs?

A)$10.00
B)$12.50
C)$11.25
D)$20.00
E)$8.75

Question 66

Answer the following question(s)using the information below.
Beta Shoe Ltd.manufactures only one type of shoe and has two divisions,the Sole Division,and the Assembly Division.The Sole Division manufactures soles for the Assembly Division,which completes the shoe and sells it to retailers.The Sole Division "sells" soles to the Assembly Division.The market price for the Assembly Division to purchase a pair of soles is $20.(Ignore changes in inventory. )The fixed costs for the Sole Division are assumed to be the same over the range of 40,000-100,000 units.The fixed costs for the Assembly Division are assumed to be $7 per pair at 100,000 units.
Sole's costs per pair of soles are:
Assembly's costs per completed pair of shoes are:

What is the market-based transfer price per pair of soles from the Sole Division to the Assembly Division?

A)$9
B)$10
C)$20
D)$16
E)$27

Question 67

Answer the following question(s)using the information below.
Cool Air Ltd.manufactures only one type of air conditioner and has two divisions,the Compressor Division,and the Assembly Division.The Compressor Division manufactures compressors for the Assembly Division,which completes the air conditioner and sells them to retailers.The Compressor Division "sells" compressors to the Assembly Division.The market price for the Assembly Division to purchase a compressor is $77.(Ignore changes in inventory. )The fixed costs for the Compressor Division are assumed to be the same over the range of 5,000-10,000 units.The fixed costs for the Assembly Division are assumed to be $15.00 per unit at 10,000 units.
Compressor's costs per compressor are:
Assembly's costs per completed air conditioner are:

If the Assembly Division sells 1,000 air conditioners at a price of $750.00 per air conditioner to customers,what is the company's operating income?

A)$200,500
B)$207,000
C)$194,000
D)$165,750
E)$230,500

Question 68

Answer the following question(s)using the information below.
Cool Air Ltd.manufactures only one type of air conditioner and has two divisions,the Compressor Division,and the Assembly Division.The Compressor Division manufactures compressors for the Assembly Division,which completes the air conditioner and sells them to retailers.The Compressor Division "sells" compressors to the Assembly Division.The market price for the Assembly Division to purchase a compressor is $77.(Ignore changes in inventory. )The fixed costs for the Compressor Division are assumed to be the same over the range of 5,000-10,000 units.The fixed costs for the Assembly Division are assumed to be $15.00 per unit at 10,000 units.
Compressor's costs per compressor are:
Assembly's costs per completed air conditioner are:

If the Assembly Division sells 1,000 air conditioners at a price of $750.00 per air conditioner to customers,what is the company's operating income?

A)$200,500
B)$207,000
C)$194,000
D)$165,750
E)$230,500

Question 69

Answer the following question(s)using the information below.
Easy Fit Ltd.manufactures heating,ventilation,and air conditioning (HVAC)equipment.The Manufacturing Division creates parts;and,the Assembly Division builds and sells the equipment.The Manufacturing Division "sells" furnace parts packages to the Assembly Division.The market price for the Assembly Division to purchase a mini furnace is $3,500.The fixed costs for the Manufacturing Division are assumed to be the same over the range of 2,000-5,000 units.The fixed costs for the Assembly Division are assumed to be $40.00 per unit at 5,000 units.
Manufacturing costs per furnace are:
Assembly's costs per completed furnace are:

If the Assembly Division sells 1,000 furnaces at a price of $3,500 per unit to customers,what is the company's operating income?

A)$3,250,000
B)$175,000
C)$1,660,000
D)$3,235,000
E)$1,395,000

Question 70

Answer the following question(s)using the information below.
Easy Fit Ltd.manufactures heating,ventilation,and air conditioning (HVAC)equipment.The Manufacturing Division creates parts;and,the Assembly Division builds and sells the equipment.The Manufacturing Division "sells" furnace parts packages to the Assembly Division.The market price for the Assembly Division to purchase a mini furnace is $3,500.The fixed costs for the Manufacturing Division are assumed to be the same over the range of 2,000-5,000 units.The fixed costs for the Assembly Division are assumed to be $40.00 per unit at 5,000 units.
Manufacturing costs per furnace are:
Assembly's costs per completed furnace are:

Assume the transfer price for a furnace is 130% of total costs of the Manufacturing Division and 5,000 of the furnaces are produced and transferred to the Assembly Division.The Manufacturing Division's operating income is

A)$3,250,000.
B)$1,175,000.
C)$2,500,000.
D)$2,625,000.
E)$2,760,000.

Question 71

Answer the following question(s)using the information below.
Cool Air Ltd.manufactures only one type of air conditioner and has two divisions,the Compressor Division,and the Assembly Division.The Compressor Division manufactures compressors for the Assembly Division,which completes the air conditioner and sells them to retailers.The Compressor Division "sells" compressors to the Assembly Division.The market price for the Assembly Division to purchase a compressor is $77.(Ignore changes in inventory. )The fixed costs for the Compressor Division are assumed to be the same over the range of 5,000-10,000 units.The fixed costs for the Assembly Division are assumed to be $15.00 per unit at 10,000 units.
Compressor's costs per compressor are:
Assembly's costs per completed air conditioner are:

What is 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 150% of variable costs?

A)$81.75
B)$77.00
C)$9.00
D)$72.75
E)$51.00

Question 72

Vancouver Valley Ltd.has two divisions,Computer Services and Management Advisory Services.In addition to its external customers,each division performs work for the other division.The external fees earned by each division in the past year were $200,000 for Computer Services and $350,000 for Management Advisory Services.Computer Services worked 3,000 hours for Management Advisory Services and Management Advisory Services in turn worked 1,200 hours for Computer Services.The total costs of external services performed were $110,000 by Computer Services,and $240,000 by Management Advisory Services.
Required:
a.Determine the operating income for each division and for the company as a whole if the transfer price from Computer Services to Management Advisory Services is $15 per hour and the transfer price from Management Advisory Services to Computer Services is $12.50 per hour.
b.Determine the operating income for each division and for the company as a whole if the transfer price from each to the other is $15 per hour.
c.What are the operating income results for each division and for the company as a whole if the two divisions net their hours worked for each other and charge $12.50 per hour for the one with the excess? Which division manager prefers this arrangement?

Question 73

Answer the following question(s)using the information below:
Greenlawn Ltd.has two divisions,Distribution and Production.The company's primary product is fertilizer.Each division's costs are provided below:
The Distribution Division has been operating at a capacity of 4,000,000 kilograms a week and usually purchases 2,000,000 kilograms from the Production Division and 2,000,000 kilograms from other suppliers at $0.45 per kilogram.
Assume 100,000 kilograms are transferred from the Production Division to the Distribution Division for a transfer price of $0.40 per kilogram.The Distribution Division sells the 100,000 kilograms at a price of $0.55 each to customers.What is the company's operating income?

A)$10,000
B)$15,000
C)$20,000
D)$25,000
E)$0

Question 74

Bedtime Bedding Ltd.manufactures pillows.The Cover Division makes covers,and the Assembly Division makes the finished products.The covers can be sold separately for $5.00.The pillows sell for $6.00.The information related to manufacturing for the most recent year is as follows:

Required:
Compute the operating income for each division and the company as a whole.Use market value as the transfer price.Are all managers happy with this concept? Explain.

Question 75

Alsation Ltd.has two divisions:.The Machining Division prepares the raw materials into component parts,and the Assembly Division assembles the components into finished product.No inventories exist in either division at the beginning of the year.During the year the Machining Division prepared 80,000 square metres of sheet metal at a cost of $480,000.All production was transferred to the Assembly Division where the metal was converted into 80,000 units of finished product at an additional costs of $5 per unit.The 80,000 units were sold for $2,000,000.
Required:
a.Determine the operating income for each division if the transfer price from Machining to Assembly is at cost.
b.Determine the operating income for each division if the transfer price is $5/square metre.
c.Since the Machining Division has all of its sales internally to the Assembly Division,does the manager care what price is selected? Why? Should the Machining Division be a cost centre or a profit centre under the circumstances?

Question 76

Answer the following question(s)using the information below.
Cool Air Ltd.manufactures only one type of air conditioner and has two divisions,the Compressor Division,and the Assembly Division.The Compressor Division manufactures compressors for the Assembly Division,which completes the air conditioner and sells them to retailers.The Compressor Division "sells" compressors to the Assembly Division.The market price for the Assembly Division to purchase a compressor is $77.(Ignore changes in inventory. )The fixed costs for the Compressor Division are assumed to be the same over the range of 5,000-10,000 units.The fixed costs for the Assembly Division are assumed to be $15.00 per unit at 10,000 units.
Compressor's costs per compressor are:
Assembly's costs per completed air conditioner are:

What is the market-based transfer price per compressor from the Compressor Division to the Assembly Division?

A)$34.00
B)$54.50
C)$69.50
D)$77.00
E)$115.50

Question 77

Answer the following question(s)using the information below.
Cool Air Ltd.manufactures only one type of air conditioner and has two divisions,the Compressor Division,and the Assembly Division.The Compressor Division manufactures compressors for the Assembly Division,which completes the air conditioner and sells them to retailers.The Compressor Division "sells" compressors to the Assembly Division.The market price for the Assembly Division to purchase a compressor is $77.(Ignore changes in inventory. )The fixed costs for the Compressor Division are assumed to be the same over the range of 5,000-10,000 units.The fixed costs for the Assembly Division are assumed to be $15.00 per unit at 10,000 units.
Compressor's costs per compressor are:
Assembly's costs per completed air conditioner are:

What is the transfer price per compressor from the Compressor Division to the Assembly Division if the transfer price per compressor is 110% of full costs?

A)$84.70
B)$80.00
C)$76.45
D)$59.95
E)$77.00

Question 78

Answer the following question(s)using the information below.
Cool Air Ltd.manufactures only one type of air conditioner and has two divisions,the Compressor Division,and the Assembly Division.The Compressor Division manufactures compressors for the Assembly Division,which completes the air conditioner and sells them to retailers.The Compressor Division "sells" compressors to the Assembly Division.The market price for the Assembly Division to purchase a compressor is $77.(Ignore changes in inventory. )The fixed costs for the Compressor Division are assumed to be the same over the range of 5,000-10,000 units.The fixed costs for the Assembly Division are assumed to be $15.00 per unit at 10,000 units.
Compressor's costs per compressor are:
Assembly's costs per completed air conditioner are:

Assume the transfer price for a compressor is 150% of total costs of the Compressor Division and 1,000 of the compressors are produced and transferred to the Assembly Division.The Compressor Division's operating income is

A)$31,750.
B)$32,750.
C)$34,750.
D)$36,500.
E)$49,750.

Question 79

Answer the following question(s)using the information below.
Easy Fit Ltd.manufactures heating,ventilation,and air conditioning (HVAC)equipment.The Manufacturing Division creates parts;and,the Assembly Division builds and sells the equipment.The Manufacturing Division "sells" furnace parts packages to the Assembly Division.The market price for the Assembly Division to purchase a mini furnace is $3,500.The fixed costs for the Manufacturing Division are assumed to be the same over the range of 2,000-5,000 units.The fixed costs for the Assembly Division are assumed to be $40.00 per unit at 5,000 units.
Manufacturing costs per furnace are:
Assembly's costs per completed furnace are:

Which of the following is an advantage of an Advance Transfer Price Arrangement (APA)?

A)The Canadian Government provides APAs free of charge to promote Canadian exports.
B)APAs save company's from the cost of keeping related party transfer records.
C)They are always cost effective.
D)An APA can reduce or eliminate the opportunity cost associated with a Canada Revenue Agency transfer price audit.
E)An APA prevents companies from having to endure transfer price audits.

Question 80

Sportswear Ltd.manufactures socks.The Athletic Division sells its socks for $6 a pair to outsiders.
Socks have manufacturing variable and fixed costs of $2.50 and $1.50,respectively.The division's total fixed manufacturing costs are $105,000 at the normal volume of 70,000 units.
The European Division has offered to buy 15,000 socks at the full cost of $4.The Athletic Division
has excess capacity and the 15,000 units can be produced without interfering with the current outside
sales of 70,000.The 85,000 volume is within the division's relevant operating range.
Explain whether the Athletic Division should accept the offer.