Question 1

If Cohasset would like to develop a range of transfer prices,what would be the maximum transfer price that Ironwood would be willing to pay?

Accepted Answer

Ironwood would be willing to pay a maximum transfer price of $1.25, which is the market price of the product.

Question 2

An appropriate transfer price between two divisions of The Stark Company can be determined from the following data: (CIA adapted) What is the natural bargaining range for the two divisions?

Accepted Answer

The natural bargaining range is between the variable cost of the selling division ($20) and the market price ($50), as the selling division would not sell below its cost, and the buying division would not pay more than the market price.

Question 3

Assume that the Plastics Division has excess capacity and it has negotiated a transfer price of $5.60 per plastic component with the Entertainment Division.This price will

Accepted Answer

The negotiated transfer price of $5.60 will motivate both divisions to work towards maximizing their profits as they will receive a share of the estimated profits. This will encourage the Plastics Division to continue manufacturing plastic components and the Entertainment Division to continue sourcing them internally, rather than seeking an outside source.

Question 4

If Cohasset would like to develop a range of transfer prices,what would be the minimum transfer price that Hurley would be willing to accept?

Accepted Answer

Hurley's variable costs are $1.00 per unit, and he wants to earn a profit of at least $0.10 per unit. Therefore, the minimum transfer price he would be willing to accept is the sum of his variable costs and desired profit, which is $1.10.

Question 5

A company has two divisions,A and B,each operated as a profit center.Division A charges Division B $35 per unit (for each unit transferred to Division B).Other data for Division A are as follows: Division A is planning to raise its transfer price to $50 per unit.Division B can purchase units at $40 per unit from outsiders,but doing so would idle Division A's facilities (now committed to producing units for Division B),Division A cannot increase its sales to outsiders.From the perspective of the company as a whole,from who should Division B acquire the units,assuming Division B's market is unaffected?

Accepted Answer

Since Division A cannot sell to outsiders and its facilities would be idle if Division B buys from outside vendors, it is more beneficial for the company as a whole for Division B to continue purchasing from Division A, even at the increased transfer price.

Question 6

Division A has variable manufacturing costs of $50 per unit and fixed costs of $10 per unit.Division A is operating significantly below capacity,what is the optimal transfer price of an internal transfer when the market price is $75?

Accepted Answer

The optimal transfer price when operating below capacity is typically the variable cost, which is $50 in this case.

Question 7

A limitation of transfer prices based on actual cost is that they (CIA adapted)

Accepted Answer

The answer of A limitation of transfer prices based on...

Question 8

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?

Accepted Answer

The answer of A division can sell externally for $60...

Question 9

Division A has variable manufacturing costs of $50 per unit and fixed costs of $10 per unit.Division A is operating at capacity,what is the opportunity cost of an internal transfer when the market price is $75?

Accepted Answer

The answer of Division A has variable manufacturing costs of...

Question 10

A per-unit transfer price from the Video Cards Division to the Entertainment Division at full cost,$9.15,would

Accepted Answer

A per-unit transfer price at full cost does not provide any profit incentive for the transferring division to control or reduce costs. In this case, the Video Cards Division may not have any motivation to improve efficiency or reduce costs since they would be able to recover all costs through the transfer price. This could lead to higher prices for the Entertainment Division and could potentially encourage them to seek video cards from outside sources. A better option would be to use a transfer price that includes only variable costs, which would encourage both divisions to focus on efficiency and cost reduction.

Question 11

Assume that the Entertainment Division is able to purchase a large quantity of video cards from an outside source at $8.70 per unit.The Video Cards Division,having excess capacity,agrees to lower its transfer price to $8.70 per unit.This action would

Accepted Answer

Lowering the transfer price to match the external purchase price allows the company to keep the transaction internal, optimizing overall profit goals by utilizing excess capacity and avoiding external purchases.

Question 12

Which of the following is the most significant disadvantage of a cost-based transfer price? (CIA adapted)

Accepted Answer

A cost-based transfer price may not promote long-term efficiencies because it does not take into account market forces and competitive pricing. This may result in an inefficient allocation of resources and potentially harm overall company performance in the long run.

Question 13

The Alpha Division of a company,which is operating at capacity,produces and sells 1,000 units of a certain electronic component in a perfectly competitive market.Revenue and cost data are as follows: (CIA adapted) The minimum transfer price that should be charged to the Beta Division of the same company for each component is

Accepted Answer

The minimum transfer price should be the market price when operating at capacity, which is $50.

Question 14

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 the manufacturing company would be a transfer price equal to the (CIA adapted)

Accepted Answer

In a perfectly competitive external market, companies must charge the market price for their products in order to remain competitive. Therefore, using the market price as the transfer price for internal sales between divisions would also ensure that each division is operating and competing under similar conditions as they would in an external market. This would encourage optimal decision-making and efficiency throughout the company. Choices A, B, and C are less optimal as they may incentivize inefficient behavior or discourage competition between divisions.

Question 15

Division B has variable manufacturing costs of $50 per unit and fixed costs of $10 per unit.Division B is operating significantly below capacity,what is the opportunity cost of an internal transfer when the market price is $75?

Accepted Answer

When operating below capacity, the opportunity cost of an internal transfer is $0 because there is no lost opportunity to sell to an external market.

Question 16

Given the following information for Division K: Division L would like to purchase internally from Division K.Division L now purchases 5,000 units each period from outside suppliers at $49 per unit.Division K has ample excess capacity to handle all of Division L's needs.What is the lowest price that Division K could accept?

Accepted Answer

Since Division K has ample excess capacity, the lowest price it could accept is the variable cost of producing the units, which is not provided but is implied to be lower than the external purchase price. The lowest price option given is $30.00, which would cover the variable costs and contribute to fixed costs or profit.

Question 17

The Eastern division sells goods internally to the Western division of the same company.The quoted external price in industry publications from a supplier near Eastern is $200 per ton plus transportation.It costs $20 per ton to transport the goods to Western.Eastern's actual market cost per ton to buy the direct materials to make the transferred product is $100.Actual per-ton direct labor is $50.Other actual costs of storage and handling are $40.The company president selects a $220 transfer price.This is an example of (CIA adapted)

Accepted Answer

The answer of The Eastern division sells goods internally to...

Question 18

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?

Accepted Answer