Deck 20: Transfer Pricing in Divisionalized Companies

Question 1

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

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

Answer 1

A

Question 2

Figure 20-2
Klaehn Industries is a decentralized company that evaluates its divisions based on ROI. The Fahl Division has the capacity to make 1,000 units of a component. The Fahl Division's variable costs are £40 per unit.
The Melton Division can use the component in one of its products. The Melton Division would incur £50 of variable costs to convert the component into its own product that sells for £160.
Refer to Figure 20-2. Assume the Fahl Division can sell all that it produces for £100 each. The Melton Division needs 100 units. What is the correct transfer price?

A)£120
B)£110
C)£100
D)£60

Answer 2

C

Question 3

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

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

Answer 3

D

Question 4

Figure 20-1
Universe Industries has two divisions: the Haley Division and the Comet Division. Information about a component that the Haley Division produces is as follows: $\begin{array}{lr}\text { Sales } & £ 120 \text { per unit } \\\text { Variable manufacturing costs } & £ 30 \text { per unit } \\\text { Fixed manufacturing overhead } & £ 20 \text { per unit } \\\text { Expected sales in units } & 4,000 \text { units }\end{array}$ The Haley Division can produce up to 5,000 components per year. The Comet Division needs 200 units of the component for a product it manufactures.

-Refer to Figure 20-1. If the selling division did NOT have excess capacity, the minimum transfer price the selling division would be willing to accept is

A)£120.
B)£75.
C)£50.
D)£30.

Question 5

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

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

Question 6

In a negotiated transfer price,

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

Question 7

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

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

Question 8

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

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

Question 9

Figure 20-1
Universe Industries has two divisions: the Haley Division and the Comet Division. Information about a component that the Haley Division produces is as follows: $\begin{array}{lr}\text { Sales } & £ 120 \text { per unit } \\\text { Variable manufacturing costs } & £ 30 \text { per unit } \\\text { Fixed manufacturing overhead } & £ 20 \text { per unit } \\\text { Expected sales in units } & 4,000 \text { units }\end{array}$ The Haley Division can produce up to 5,000 components per year. The Comet Division needs 200 units of the component for a product it manufactures.

-Refer to Figure 20-1. The maximum transfer price that the Comet Division would be willing to pay is

A)£120.
B)£70.
C)£50.
D)£30.

Question 10

Transfer pricing is used when:

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

Question 11

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

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

Question 12

Figure 20-2
Klaehn Industries is a decentralized company that evaluates its divisions based on ROI. The Fahl Division has the capacity to make 1,000 units of a component. The Fahl Division's variable costs are £40 per unit.
The Melton Division can use the component in one of its products. The Melton Division would incur £50 of variable costs to convert the component into its own product that sells for £160.
Refer to Figure 20-2. Assume the Fahl Division can sell 800 units at £120 each. Any excess capacity will be unused unless the units are purchased by the Melton Division, which could use up to 100 units. The minimum transfer price that the Fahl Division would be willing to accept would be

A)£120.
B)£110.
C)£100.
D)£40.

Question 13

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

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

Question 14

If it is available, the correct transfer price is

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

Question 15

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

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

Question 16

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

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

Question 17

Figure 20-1
Universe Industries has two divisions: the Haley Division and the Comet Division. Information about a component that the Haley Division produces is as follows: $\begin{array}{lr}\text { Sales } & £ 120 \text { per unit } \\\text { Variable manufacturing costs } & £ 30 \text { per unit } \\\text { Fixed manufacturing overhead } & £ 20 \text { per unit } \\\text { Expected sales in units } & 4,000 \text { units }\end{array}$ The Haley Division can produce up to 5,000 components per year. The Comet Division needs 200 units of the component for a product it manufactures.

-Refer to Figure 20-1. The minimum transfer price that the Haley Division would be willing to accept is

A)£120.
B)£70.
C)£50.
D)£30.

Question 18

Negotiated prices transfer prices are:

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

Question 19

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

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

Question 20

The optimal transfer price from the viewpoint of the company is

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

Question 21

Figure 20-8
Pautner Company had the following historical accounting data per unit: $\begin{array}{lr}\text { Direct materials } & £ 60 \\\text { Direct labour } & 30 \\\text { Variable overhead } & 15 \\\text { Fixed overhead } & 24 \\\text { Variable selling expenses } & 45 \\\text { Fixed selling expenses } & 9\end{array}$ The units are normally transferred internally from Division A to Division B. The units also may be sold externally for £210 per unit. The minimum profit level accepted by the company is a markup of 30 per cent. There were no beginning or ending inventories.

-Refer to Figure 20-8. What would be the transfer price if Division X uses full cost plus markup?

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

Question 22

Figure 20-6
Callahan Industries is a decentralized company that evaluates its divisions based on ROI. The Jones Division has the capacity to make 5,000 units of a component. The Jones Division's variable costs are £200 per unit.
The Thomas Division can use the component in one of its products. The Thomas Division would incur £100 of variable costs to put the component in its own product that sells for £500.
Refer to Figure 20-6. The Jones Division can sell all that it produces for £360 each. The Jones Division needs 200 units. What is the correct transfer price?

A)£400
B)£200
C)£420
D)£360

Question 23

Figure 20-9
Miggs Manufacturing has one plant located in Belgium and another plant located in the United States. The Belgium plant manufactures a component used in a finished product manufactured at the U.S. plant. Currently, the Belgium plant is operating at 70 per cent capacity. In Belgium, the income tax rate is 42 per cent; in the United States, the corporate income tax rate is 35 per cent.
The market price of the component is £200 and the Belgium plant's costs to manufacture the component are as follows: $\begin{array}{lr}\text { Direct materials } & £ 20 \\\text { Direct labour } & 40 \\\text { Variable overhead } & 10 \\\text { Fixed overhead } & 30\end{array}$

-Refer to Figure 20-9. Which transfer price would be in the best interest of the overall company?

A)£70
B)£110
C)£120
D)£200

Question 24

Figure 20-10
Gregg Manufacturing has one plant located in Belgium and another plant located in the United States. The Belgium plant manufactures a component used in a finished product manufactured at the U.S. plant. Currently, the Belgium plant is operating at 70 per cent capacity. In Belgium, the income tax rate is 30 per cent; in the United States, the corporate income tax rate is 35 per cent.
The market price of the component is £280 and the Belgium plant's costs to manufacture the component are as follows: $\begin{array}{lr}\text { Direct materials } & £ 30 \\\text { Direct labour } & 50 \\\text { Variable overhead } & 12 \\\text { Fixed overhead } & 56\end{array}$

-Refer to Figure 20-10. What is the minimum transfer price that the Belgium division would be willing to accept?

A)£280
B)£148
C)£136
D)£92

Question 25

Figure 20-5
Allied Industries has two divisions: the Bradley Division and the Rommel Division. Information about the component that the Bradley Division produces is as follows: $\begin{array}{lr}\text { Sales } & £ 180 \text { per unit } \\\text { Variable manufacturing costs } & £ 80 \text { per unit } \\\text { Fixed manufacturing overhead } & £ 50 \text { per unit } \\\text { Expected sales in units } & 10,000 \text { units }\end{array}$ The Bradley Division can produce up to 12,000 components per year. The Rommel Division needs 800 units of the component for a product it manufactures.

-Refer to Figure 20-5. If the selling division did NOT have excess capacity, the minimum transfer price the selling division would be willing to accept would be

A)£50.
B)£80.
C)£130.
D)£180.

Question 26

Figure 20-8
Pautner Company had the following historical accounting data per unit: $\begin{array}{lr}\text { Direct materials } & £ 60 \\\text { Direct labour } & 30 \\\text { Variable overhead } & 15 \\\text { Fixed overhead } & 24 \\\text { Variable selling expenses } & 45 \\\text { Fixed selling expenses } & 9\end{array}$ The units are normally transferred internally from Division A to Division B. The units also may be sold externally for £210 per unit. The minimum profit level accepted by the company is a markup of 30 per cent. There were no beginning or ending inventories.

-Refer to Figure 20-8. If variable manufacturing costs without a fixed fee are used as the transfer price, Division A's transfer price would be

A)£60.
B)£90.
C)£105.
D)£144.

Question 27

Figure 20-9
Miggs Manufacturing has one plant located in Belgium and another plant located in the United States. The Belgium plant manufactures a component used in a finished product manufactured at the U.S. plant. Currently, the Belgium plant is operating at 70 per cent capacity. In Belgium, the income tax rate is 42 per cent; in the United States, the corporate income tax rate is 35 per cent.
The market price of the component is £200 and the Belgium plant's costs to manufacture the component are as follows: $\begin{array}{lr}\text { Direct materials } & £ 20 \\\text { Direct labour } & 40 \\\text { Variable overhead } & 10 \\\text { Fixed overhead } & 30\end{array}$

-Refer to Figure 20-9. What is the minimum transfer price that the Belgium division would be willing to accept?

A)£70
B)£110
C)£120
D)£200

Question 28

Figure 20-6
Callahan Industries is a decentralized company that evaluates its divisions based on ROI. The Jones Division has the capacity to make 5,000 units of a component. The Jones Division's variable costs are £200 per unit.
The Thomas Division can use the component in one of its products. The Thomas Division would incur £100 of variable costs to put the component in its own product that sells for £500.
Refer to Figure 20-6. Assume the Jones Division can sell 4,000 units at £420. Any excess capacity will be unused unless the units are purchased by the Thomas Division, which could use up to 200 units. The maximum transfer price that the Thomas Division would be willing to pay would be

A)£400.
B)£200.
C)£420.
D)£360.

Question 29

Conner Manufacturing has one plant located in Italy and another plant located in the United States. The Italian plant manufactures a component used in a finished product manufactured at the U.S. plant. Currently, the Italian plant is operating at 75 per cent capacity. In Italy, the income tax rate is 32 per cent; in the United States, the corporate income tax rate is 35 per cent. The market price of the component is £240 and the Italian plant's costs to manufacture the component are as follows: $\begin{array}{lr}\text { Direct materials } & £ 60 \\\text { Direct labour } & 40 \\\text { Variable overhead } & 20 \\\text { Fixed overhead } & 30\end{array}$ Which transfer price would be in the best interest of the overall company?

A)£120
B)£100
C)£150
D)£240

Question 30

Figure 20-2
Klaehn Industries is a decentralized company that evaluates its divisions based on ROI. The Fahl Division has the capacity to make 1,000 units of a component. The Fahl Division's variable costs are £40 per unit.
The Melton Division can use the component in one of its products. The Melton Division would incur £50 of variable costs to convert the component into its own product that sells for £160.
Refer to Figure 20-2. Assume the Fahl Division can sell 800 units at £120 each. Any excess capacity will be unused unless the units are purchased by the Melton Division, which could use up to 100 units. The maximum transfer price that the Melton Division would be willing to pay would be

A)£120.
B)£110.
C)£100.
D)£60.

Question 31

Figure 20-7
The Engine Division provides engines for the Tractor Division of a company. The standard unit costs for Engine Division are as follows: $\begin{array}{lr}\text { Direct materials } & £ 600 \\\text { Direct labour } & 1,200 \\\text { Variable overhead } & 300 \\\text { Fixed overhead } & 150 \\\text { Market price per unit } & 2,730\end{array}$

-Refer to Figure 20-7. The engine department has excess capacity. What is the best transfer price to avoid transfer price problems?

A)£1,350
B)£300
C)£900
D)£2,100

Question 32

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

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

Question 33

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

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

Question 34

Figure 20-7
The Engine Division provides engines for the Tractor Division of a company. The standard unit costs for Engine Division are as follows: $\begin{array}{lr}\text { Direct materials } & £ 600 \\\text { Direct labour } & 1,200 \\\text { Variable overhead } & 300 \\\text { Fixed overhead } & 150 \\\text { Market price per unit } & 2,730\end{array}$

-Refer to Figure 20-7. What is the best transfer price to avoid transfer price problems?

A)£2,730
B)£600
C)£1,800
D)£2,100

Question 35

Figure 20-9
Miggs Manufacturing has one plant located in Belgium and another plant located in the United States. The Belgium plant manufactures a component used in a finished product manufactured at the U.S. plant. Currently, the Belgium plant is operating at 70 per cent capacity. In Belgium, the income tax rate is 42 per cent; in the United States, the corporate income tax rate is 35 per cent.
The market price of the component is £200 and the Belgium plant's costs to manufacture the component are as follows: $\begin{array}{lr}\text { Direct materials } & £ 20 \\\text { Direct labour } & 40 \\\text { Variable overhead } & 10 \\\text { Fixed overhead } & 30\end{array}$

-Refer to Figure 20-9. What is the maximum transfer price that the U.S. division would be willing to pay?

A)£70
B)£110
C)£120
D)£200

Question 36

Figure 20-5
Allied Industries has two divisions: the Bradley Division and the Rommel Division. Information about the component that the Bradley Division produces is as follows: $\begin{array}{lr}\text { Sales } & £ 180 \text { per unit } \\\text { Variable manufacturing costs } & £ 80 \text { per unit } \\\text { Fixed manufacturing overhead } & £ 50 \text { per unit } \\\text { Expected sales in units } & 10,000 \text { units }\end{array}$ The Bradley Division can produce up to 12,000 components per year. The Rommel Division needs 800 units of the component for a product it manufactures.

-Refer to Figure 20-5. The minimum transfer price that the Bradley Division would be willing to accept is

A)£50.
B)£80.
C)£130.
D)£180.

Question 37

Figure 20-10
Gregg Manufacturing has one plant located in Belgium and another plant located in the United States. The Belgium plant manufactures a component used in a finished product manufactured at the U.S. plant. Currently, the Belgium plant is operating at 70 per cent capacity. In Belgium, the income tax rate is 30 per cent; in the United States, the corporate income tax rate is 35 per cent.
The market price of the component is £280 and the Belgium plant's costs to manufacture the component are as follows: $\begin{array}{lr}\text { Direct materials } & £ 30 \\\text { Direct labour } & 50 \\\text { Variable overhead } & 12 \\\text { Fixed overhead } & 56\end{array}$

-Refer to Figure 20-10. What is the maximum transfer price that the U.S. division would be willing to pay?

A)£280
B)£148
C)£136
D)£92

Question 38

Figure 20-5
Allied Industries has two divisions: the Bradley Division and the Rommel Division. Information about the component that the Bradley Division produces is as follows: $\begin{array}{lr}\text { Sales } & £ 180 \text { per unit } \\\text { Variable manufacturing costs } & £ 80 \text { per unit } \\\text { Fixed manufacturing overhead } & £ 50 \text { per unit } \\\text { Expected sales in units } & 10,000 \text { units }\end{array}$ The Bradley Division can produce up to 12,000 components per year. The Rommel Division needs 800 units of the component for a product it manufactures.

-Refer to Figure 20-5. The maximum transfer price that the Rommel Division would be willing to pay is

A)£50.
B)£80.
C)£130.
D)£180.

Question 39

British International has a division in the United States that produces tires for automobiles. These tires are transferred to an automobile division in Germany. The tires can be (and are) sold externally in the United States for £60 each. The cost to produce a tire is £40. It costs £3 per tire for shipping and £5 per tire for import duties. When the tires are sold externally, British International spends £2 per tire for commissions and an average of £1 per tire for advertising. An acceptable markup is 30 per cent of costs. What is the transfer price if the cost-plus method is used?

A)£78.00
B)£60.00
C)£84.50
D)£52.00

Question 40

Figure 20-6
Callahan Industries is a decentralized company that evaluates its divisions based on ROI. The Jones Division has the capacity to make 5,000 units of a component. The Jones Division's variable costs are £200 per unit.
The Thomas Division can use the component in one of its products. The Thomas Division would incur £100 of variable costs to put the component in its own product that sells for £500.
Refer to Figure 20-6. Assume the Jones Division can sell 4,000 units at £420. Any excess capacity will be unused unless the units are purchased by the Thomas Division, which could use up to 200 units. The minimum transfer price that the Jones Division would be willing to accept would be

A)£400.
B)£200.
C)£420.
D)£360.

Question 41

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

Question 42

The Kelly Division of Zimmer Company sells all of its output to the Finishing Division of the company. The only product of the Kelly Division is chair legs that are used by the Finishing Division. The retail price of the legs is £20 per leg. Each chair completed by the Finishing Division requires four legs. Production quantity and cost data for 2011 are as follows: $\begin{array}{lr}\text { Chair legs } & £ 30,000 \\\text { Direct materials } & £ 135,000 \\\text { Direct labour } & £ 90,000 \\\text { Factory overhead (25\% is variable) } & £ 90,000 \\\text { Operating expenses (20\% is variable) } & £ 150,000\end{array}$
Required:

Compute the transfer price for a chair leg using:
a.market price.
b.variable product costs plus a fixed fee of 20 per cent.
c.full cost plus 20 per cent markup.
d.variable costs.
e.full cost plus 10 per cent markup.

Question 43

Halber Industries is a decentralized company that evaluates its divisions based on ROI. The Brock Division has the capacity to make 2,000 units of a component. The Brock Division's variable costs are £80 per unit.
The Cliff Division can use the Brock component in the manufacturing of one of its own products. The Cliff Division would incur £60 of variable costs to convert the component into its own product, which sells for £300.
a.Assume the Brock Division can sell all of the components that it produces for £180 each. The Cliff Division needs 100 units. What is the correct transfer price?
b.Assume the Brock Division can sell 1,800 units at £260. Any excess capacity will be unused unless the units are purchased by the Cliff Division, which could use up to 100 units.Determine the minimum transfer price that the Brock Division would be willing to accept.Determine the maximum transfer price that the Cliff Division would be willing to pay.