Deck 15: Transfer Pricing

Question 1

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

Answer 1

False

Question 2

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

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

If an intermediate market exists but divisions are prohibited from buying or selling from the outside,the intermediate market can be ignored in determining the optimal transfer price.

Question 18

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 19

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 20

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 21

When the selling division in an internal transfer has unsatisfied demand from outside customers for the product that is being transferred,then the lowest acceptable transfer price as far as the selling division is concerned 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 22

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 23

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 24

The Raisin Division of Trail Mix Foods,Inc.had the following operating results last year:
$$\begin{array} { | l | r | } \hline \text { Sales } ( 150,000 \text { pounds of raisins) } & \$ 60,000 \\\hline \text { Variable expenses } & 37,500 \\\hline \text { Contribution margin } & 22,500 \\\hline \text { Fixed expenses } & 12,000 \\\hline \text { Profit } & \$ 10,500 \\\hline\end{array}$$ 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) $0.40 per pound.
B) $0.08 per pound.
C) $0.15 per pound.
D) $0.25 per pounD.
See calculation below.

Question 25

Division X makes a part that it sells to customers outside of the company.Data concerning this part appear below:
$$\begin{array} { | l | r | } \hline \text { Selling price to outside } & \$ 50 \\\text { customers } & \\\hline \text { Variable cost per unit } &\$ 30 \\\hline \text { Total fixed costs } & \$ 400,000\\\hline \text { Capacity in units } & 25,000\\\hline\end{array}$$ 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 cutting into outside sales.According to the formula in the text,what is the lowest acceptable transfer price from the standpoint of the selling division?

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

Question 26

Part 43X costs the Southern Division of Norris Corporation $26 to make - direct materials are $10,direct labor is $4,variable manufacturing overhead is $9,and fixed manufacturing overhead is $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 27

The Raisin Division of Trail Mix Foods,Inc.had the following operating results last year:
$$\begin{array} { | l | r | } \hline \text { Sales } ( 150,000 \text { pounds of raisins) } & \$ 60,000 \\\hline \text { Variable expenses } & 37,500 \\\hline \text { Contribution margin } & 22,500 \\\hline \text { Fixed expenses } & \underline{12,000} \\\hline \text { Profit } & \$ 10,500 \\\hline\end{array}$$ 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 Raisin Division is currently operating at its capacity of 200,000 pounds of raisins.Also assume again 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 Peanut 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.
See calculation below.

Question 28

Dockside Enterprises Inc. ,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,as well as other large-hull ships.The repair division has an estimated variable cost of $37 per labor-hour.The repair division has a backlog of work for outside ships.They charge $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 29

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 30

Dockside Enterprises Inc. ,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,as well as other large-hull ships.The repair division has an estimated variable cost of $37 per labor-hour.The repair division has a backlog of work for outside ships.They charge $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 31

The Gear Division makes a part with the following characteristics:
$$\begin{array} { | l | r | } \hline \text { Production capacity } & 25,000 \text { units } \\\hline \text { Selling price to outside customers } & \$ 18 \\\hline \text { Variable cost per unit } & \$ 11 \\\hline \text { Fixed cost, total } & \$ 100,000 \\\hline\end{array}$$ 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 cutting into 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.
See calculations below.

Question 32

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

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

Question 33

Dockside Enterprises Inc. ,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,as well as other large-hull ships.The repair division has an estimated variable cost of $37 per labor-hour.The repair division has a backlog of work for outside ships.They charge $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 34

You have been provided with the following information for Division X of a decentralized company:
$$\begin{array} { | l | r | } \hline \text { Selling price } & \$ 90 \\\hline \text { Variable cost per unit } & 66 \\\hline \text { Fixed costper unit } & 20 \\\hline \text { Sales volume (units) } & 22,500 \\\hline \text { Capacity (units) } & 26,000 \\\hline\end{array}$$ 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 35

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 36

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 37

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 38

Transfer prices would not be used by:

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

Question 39

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 $87 per wheel set,the change in annual net operating income for the company as a whole,compared to what it is currently,would be:

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

Question 40

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 41

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 at $2.50 each.The following data are available for last year's activities in the Stake Division:
In order to sell 50,000 stakes to the Solar Light Division,the Stake Division must 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.According to the formula in the text,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 42

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 43

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 44

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 45

The Lock Division of Morgantown Corp.sells 80,000 units of part Z-25 to the outside market.Part Z-25 sells for $40,has a variable cost of $22,and a fixed cost per unit of $10.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 accepts the outside 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 46

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.Last year,the Lantern Division bought all of its 25,000 pillars from Pillar at $1.50 each.The following data are available for last year's activities of the Pillar Division:
$$\begin{array} { | l | r | } \hline \text { Capacity in units } & \begin{array} { r } 300,000 \\\text { pillars }\end{array} \\\hline \text { Selling price per pillar to outside } & \$ 1.75 \\\text { customers } & \\\hline \text { Variable costs per pillar } &\$ 0.90\\\hline \text { Fixed costs, total } & \$ 150,000 \\\hline\end{array}$$ The total fixed costs would be the same for all the alternatives considered below.Suppose there is ample capacity so that transfers of the pillars to the Lantern Division do not cut into 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 47

Lock Division of Morgantown Corp.sells 80,000 units of part Z-25 to the outside market.Part Z-25 sells for $40,has a variable cost of $22,and a fixed cost per unit of $10.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 the outside 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 48

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.Last year,the Lantern Division bought all of its 25,000 pillars from Pillar at $1.50 each.The following data are available for last year's activities of the Pillar Division:
$$\begin{array} { | l | r | } \hline \text { Capacity in units } & \begin{array} { r } 300,000 \\\text { pillars }\end{array} \\\hline \text { Selling price per pillar to outside } & \$ 1.75 \\\text { customers } & \\\hline \text { Variable costs per pillar } & \$ 0.90 \\\hline \text { Fixed costs, total } & \$ 150,000\\\hline\end{array}$$ The total fixed costs would be the same for all the alternatives considered below.Suppose the transfers of pillars to the Lantern Division cut into 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 49

The Gear Division makes a part with the following characteristics:
$$\begin{array} { | l | r | } \hline \text { Production capacity } & 25,000 \text { units } \\\hline \text { Selling price to outside customers } & \$ 18 \\\hline \text { Variable cost per unit } & \$ 11 \\\hline \text { Fixed cost, total } & \$ 100,000 \\\hline\end{array}$$ 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 50

Division X of Operandi Corporation makes and sells a single product which is used by manufacturers of fork lift trucks.Presently it sells 12,000 units per year to outside customers at $24 per unit.The annual capacity is 20,000 units and the variable cost 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 51

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 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 at $2.50 each.The following data are available for last year's activities in the Stake Division: In order to sell 50,000 stakes to the Solar Light Division,the Stake Division must 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

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 54

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 55

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

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

Question 56

Division X makes a part that it sells to customers outside of the company.Data concerning this part appear below:
$$\begin{array} { | l | r | } \hline \text { Selling price to outside customers } & \$ 50 \\\hline \text { Variable cost per unit } & \$ 30 \\\hline \text { Total fixed costs } & \$ 400,000 \\\hline \text { Capacity in units } & 25,000 \\\hline\end{array}$$ 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 57

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

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

Question 58

The optimal transfer price when there are intermediate markets is:

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

Question 59

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.Last year,the Lantern Division bought all of its 25,000 pillars from Pillar at $1.50 each.The following data are available for last year's activities of the Pillar Division:
$$\begin{array} { | l | r | } \hline \text { Capacity in units } & \begin{array} { r } 300,000 \\\text { pillars }\end{array} \\\hline \text { Selling price per pillar to outside } & \$ 1.75 \\\text { customers } & \\\hline \text { Variable costs per pillar } &\$ 0.90 \\\hline \text { Fixed costs, total } &\$ 150,000\\\hline\end{array}$$ The total fixed costs would be the same for all the alternatives considered below.Suppose the transfers of pillars to the Lantern Division cut into 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 60

Which of the following statements is(are)true? (A)If a transfer has no effect on divisional profit,managers will be indifferent between making the transfer or not.(B)If an intermediate market exists but divisions are prohibited from buying or selling from the outside,the intermediate market can be ignored in determining the optimal transfer price.

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

Question 61

Given the following data for Electrical Cord Division:
$$\begin{array} { | l | r | } \hline \text { Selling price to outside customers } & \$ 40 \\\hline \text { Variable cost per unit } & 30 \\\hline \text { Fixed cost- Total } & 10,000 \\\hline \text { Capacity (in units) } & 2,000 \\\hline\end{array}$$ Assume that 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 62

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.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 63

You have been provided with the following information for the Wool Division of a decentralized company:
$$\begin{array} { | l | r | } \hline \text { Selling price } & \$ 46 \\\hline \text { Variable cost per unit } & 33 \\\hline \text { Fixed costper unit } & 12 \\\hline \text { Sales volume (units) } & 22,500 \\\hline \text { Capacity (units) } & 26,000 \\\hline\end{array}$$ 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.What is the lowest price that Wool Division could accept from the Blanket Division? 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 could accept from the Blanket Division?

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

Question 64

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

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

Question 65

Retro Rides Inc. ,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.The Repair division 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.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 66

Frocks and Gowns Inc. ,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 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 minimum transfer price for the 25,000 unit order that the Day Wear Division would accept if it wishes to maintain its pre-order contribution?

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

Question 67

Frocks and Gowns Inc. ,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 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 68

Given the following data for Handle Division:
$$\begin{array} { | l | r | } \hline \text { Selling price to outside customers } & \$ 150 \\\hline \text { Variable cost per unit } & 80 \\\hline \text { Fixed cost per unit (based on capacity) } & 30 \\\hline \text { Capacity (in units) } & 50,000 \\\hline\end{array}$$ 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 69

Martin Company currently manufactures all component parts used in the manufacture of various hand tools.The Extruding Division produces a steel handle used in three different tools.The budget for these handles is 120,000 units with the following unit cost. $$\begin{array} { | l | r | } \hline \text { Direct material } & \$ .60 \\\hline \text { Direct labor } & .40 \\\hline \text { Variable overhead } & .10 \\\hline \text { Fixed overhead } &\underline{ .20 }\\\hline \text { Total unit cost } & \$ 1.30 \\\hline\end{array}$$ Polishing Division purchases 20,000 handles from the Extruding Division and completes the hand tools.An outside supplier,Venture Steel,has offered to supply 20,000 units of the handle to Polishing Division for $1.25 per unit.The Extruding Division currently has idle capacity that cannot be used.What is the cost impact to Martin as a whole of purchasing from Venture Steel? (CMA adapted)

A) increase the handle unit cost by $0.05.
B) increase the handle unit cost by $0.15.
C) decrease the handle unit cost by $0.15.
D) decrease the handle unit cost by $0.25.

Question 70

Retro Rides Inc. ,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.The Repair division 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.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 71

Given the following data for Keyboard Division:
$$\begin{array} { | l | r | } \hline \text { Selling price to outside customers } & \$ 25 \\\hline \text { Variable cost per unit } & 12 \\\hline \text { Fixed cost- Total } & 50,000 \\\hline \text { Capacity (in units) } & 125,000 \\\hline\end{array}$$ 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 72

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 73

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 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 74

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 75

Martin Company currently manufactures all component parts used in the manufacture of various hand tools.The Extruding Division produces a steel handle used in three different tools.The budget for these handles is 120,000 units with the following unit cost. $$\begin{array} { | l | r | } \hline \text { Direct material } & \$ .60 \\\hline \text { Direct labor } & .40 \\\hline \text { Variable overhead } & .10 \\\hline \text { Fixed overhead } & \underline{.20} \\\hline \text { Total unit cost } & \$ 1.30 \\\hline\end{array}$$ Polishing Division purchases 20,000 handles from the Extruding Division and completes the hand tools.An outside supplier,Venture Steel,has offered to supply 20,000 units of the handle to Polishing Division for $1.25 per unit.The Extruding Division currently has idle capacity that cannot be used.If Martin would like to develop a range of transfer prices,what would be the maximum transfer price that Polishing would be willing to pay?

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

Question 76

Retro Rides Inc. ,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.The Repair division 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.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 77

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 maximum transfer price from the Hinge Division to the Door Division?

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

Question 78

Given the following information for Camping Division:
$$\begin{array} { | l | r | } \hline \text { Selling price to outside customers } & \$ 50 \\\hline \text { Variable cost per unit } & \$ 30 \\\hline \text { Total fixed costs } & \$ 400,000 \\\hline \text { Capacity in units } & 25,000 \\\hline\end{array}$$ The Lantern Division would like to purchase internally from the Camping Division.The Lantern Division now purchases 5,000 units each period from outside suppliers at $49 per unit.The Camping Division has ample excess capacity to handle all of the Lantern Division's needs.What is the lowest price that Camping Division could accept?

A) $50.00.
B) $49.00.
C) $46.00.
D) $30.00.

Question 79

Frocks and Gowns Inc. ,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 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 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 80

A company has two divisions,Softwoods and Hardwoods,each operating as a profit center.The Softwood Division charges the Hardwood Division $35 per unit (for each unit transferred to the Hardwood Division).Other data for the Softwood Division are as follows:
$$\begin{array} { | l | r | } \hline \text { Variable Cost per unit } & \$ 30 \\\hline \text { Fixed Costs } & \$ 10,000 \\\hline \text { Annual Sales to the Hardwood Division } & 5,000 \text { units } \\\hline \text { Annual Sales to Outsiders } & 50,000 \text { units } \\\hline\end{array}$$ The Softwood Division is planning to raise its transfer price to $50 per unit.The Hardwood Division can purchase units at $40 per unit from outsiders,but doing so would idle the Softwood Division's facilities (now committed to producing units for the Hardwood Division).The Softwood Division cannot increase its sales to outsiders.From the perspective of the company as a whole,from who should the Hardwood Division acquire the units,assuming the Hardwood Division's market is unaffected?

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