Question 1

When there is an outside market for an intermediate product that is perfectly competitive,what is the most equitable method of transfer pricing?
A)market price
B)production cost pricing
C)variable cost pricing
D)cost plus markup pricing

Accepted Answer

When an outside market exists for an intermediate product and it is perfectly competitive, it's best to use market price as the most equitable method of transfer pricing. This is because market prices are determined by supply and demand forces and represent the true value of the product in the marketplace. Using any other method, such as cost-based pricing, may result in unfairly transferring profits between departments or subsidiaries.

Question 2

It is important to separate the evaluation of a manager from the evaluation of his or her division in a multinational firm.What should be omitted from manager's evaluation?
A)revenues
B)income taxes
C)operating costs
D)cost of goods sold

Accepted Answer

Income taxes should be omitted from a manager's evaluation because they can vary significantly across different countries due to local tax laws and rates, which are beyond the manager's control. This ensures the evaluation focuses on factors the manager can influence.

Question 3

In the Ambros Company,Division A has a product that can be sold either to outside customers or to Division B.Information about these divisions is given below: $\begin{array}{lrr}
\text { Division A: }&\text { Case } 1&\text { Case } 2\
\text { Capacity in units } & 100,000 & 100,000 \
\text { Number of units sold externally } & 100,000 & 60,000 \
\text { Market selling price } & \$ 90 & \$ 75 \
\text { Variable costs per unit } & 73 & 58 \
\text { Fixed costs per unit based on capacity } & 10 & 10\
\
\text { Division B: }\
\text {Number of units needed for production}&40,000&40,000\
 \text {Purchase price per unit from external supplier}&\$91&\$74
\end{array}$
 The company uses the opportunity cost approach to transfer pricing.What is the maximum transfer price in Case 1?
A)$73
B)$83
C)$90
D)$91

Accepted Answer

The maximum transfer price under the opportunity cost approach in Case 1 is the market selling price of $90 plus the opportunity cost. Since Division A can sell all its units externally at $90, it foregoes this amount by selling internally. However, Division B is willing to pay up to $91 (the external supplier's price), making $91 the maximum transfer price that Division A could charge Division B, ensuring Division A is no worse off.

Question 4

Division A produces a component and wants to sell it to Division B.What does the transfer price represent for each division?
A)revenue to Division A and a cost to Division B
B)revenue to Division B and a cost to Division A
C)revenue to Division A and no effect on Division B
D)a cost to Division B and no effect on Division A

Accepted Answer

The transfer price represents revenue for the selling division (Division A) because it is the amount they receive for the component, and it represents a cost for the buying division (Division B) because it is the amount they have to pay to acquire the component.

Question 5

The Engine Division provides engines for the Tractor Division of a company. The standard unit costs for Engine Division are as follows:
$$\begin{array} { l r } 
\text { Direct materals }&\$600 \
\text { Direct labour } & 1,200 \
\text { Variable overhead } & 300 \
\text { Fixed overhead } & 150 \
\text { Market price per unit } & 2,730
\end{array}$$
-Refer to the figure.What is the best transfer price to avoid transfer price problems?
A)$600
B)$1,800
C)$2,100
D)$2,730

Accepted Answer

The best transfer price to avoid transfer price problems is the market price per unit, which is $2,730. This ensures that the selling division (Engine Division) is fairly compensated for the goods it provides, reflecting the price it could obtain in the open market.

Question 6

What is the term for the transfer price that would leave the buying division no worse off if an input is purchased from an internal division?
A)the negotiated transfer price
B)the minimum transfer price
C)the maximum transfer price
D)the coordinated transfer price

Accepted Answer

The answer of What is the term for the transfer...

Question 7

In the Ambros Company, Division A has a product that can be sold either to outside customers or to Division B. Information about these divisions is given below:
$\begin{array}{lrr}
\text { Division A: }&\text { Case } 1&\text { Case } 2\
\text { Capacity in units } & 100,000 & 100,000 \
\text { Number of units sold externally } & 100,000 & 60,000 \
\text { Market selling price } & \$ 90 & \$ 75 \
\text { Variable costs per unit } & 73 & 58 \
\text { Fixed costs per unit based on capacity } & 10 & 10\
\
\text { Division B: }\
\text {Number of units needed for production}&40,000&40,000\
 \text {Purchase price per unit from external supplier}&\$86&\$74
\end{array}$

-Refer to the figure.The company uses the opportunity cost approach to transfer pricing.What is the maximum transfer price in Case 2?
A)$58
B)$68
C)$74
D)$75

Accepted Answer

The maximum transfer price is the minimum of the market selling price and the purchase price from an external supplier. In Case 2, the market selling price is $75 and the purchase price from an external supplier is $74. Therefore, the maximum transfer price is $74.

Question 8

What managerial rewards encourage a short-term orientation?
A)cash bonuses
B)profit sharing
C)stock ownership
D)promotion from within

Accepted Answer

Cash bonuses are typically tied to short-term performance goals, encouraging managers to focus on immediate results rather than long-term sustainability. Profit sharing and stock ownership can have both short-term and long-term benefits, depending on the structure of the program. Promotion from within may also encourage a short-term orientation if performance is evaluated based mainly on achieving near-term objectives rather than developing skills and capabilities for the future.

Question 9

What is the term for the transfer price that would leave the selling division no worse off if the good is sold to an internal division?
A)the negotiated transfer price
B)the minimum transfer price
C)the maximum transfer price
D)the coordinated transfer price

Accepted Answer

The term for the transfer price that would leave the selling division no worse off if the good is sold to an internal division is known as the minimum transfer price. This means the transfer price cannot be lower than the variable cost of producing the product. If the transfer price is lower than the variable cost, the selling division will be better off selling to an external customer rather than selling internally to another division.

Question 10

In the Ambros Company, Division A has a product that can be sold either to outside customers or to Division B. Information about these divisions is given below:
$\begin{array}{lrr}
\text { Division A: }&\text { Case } 1&\text { Case } 2\
\text { Capacity in units } & 100,000 & 100,000 \
\text { Number of units sold externally } & 100,000 & 60,000 \
\text { Market selling price } & \$ 90 & \$ 75 \
\text { Variable costs per unit } & 73 & 58 \
\text { Fixed costs per unit based on capacity } & 10 & 10\
\
\text { Division B: }\
\text {Number of units needed for production}&40,000&40,000\
 \text {Purchase price per unit from external supplier}&\$86&\$74
\end{array}$

-Refer to the figure.The company uses the opportunity cost approach to transfer pricing.What is the minimum transfer price in Case 1?
A)$73
B)$83
C)$86
D)$90

Accepted Answer

The answer of In the Ambros Company, Division A has...

Question 11

Why might it be misleading to compare the ROI of international divisions?
A)the absence of activity-based management
B)differing production technologies
C)the lack of good information
D)differing environmental factors

Accepted Answer

Comparing the ROI of international divisions may be misleading because there may be differing environmental factors in each location that affect their performance. For example, economic conditions, government regulations, and cultural differences could all impact the profitability of a division in one country versus another. Therefore, it is important to consider these external factors when comparing the ROI of international divisions.

Question 12

In the Ambros Company, Division A has a product that can be sold either to outside customers or to Division B. Information about these divisions is given below:
$\begin{array}{lrr}
\text { Division A: }&\text { Case } 1&\text { Case } 2\
\text { Capacity in units } & 100,000 & 100,000 \
\text { Number of units sold externally } & 100,000 & 60,000 \
\text { Market selling price } & \$ 90 & \$ 75 \
\text { Variable costs per unit } & 73 & 58 \
\text { Fixed costs per unit based on capacity } & 10 & 10\
\
\text { Division B: }\
\text {Number of units needed for production}&40,000&40,000\
 \text {Purchase price per unit from external supplier}&\$86&\$74
\end{array}$

-Refer to the figure.The company uses the opportunity cost approach to transfer pricing.Which case should be transferred internally?
A)Case 1
B)Case 2
C)neither
D)both

Accepted Answer

The answer of In the Ambros Company, Division A has...

Question 13

What are transfer prices?
A)the prices charged for distributing goods from one warehouse to another
B)the prices charged for the goods produced by one division to another division that needs these goods
C)the prices charged when delivering goods to the customer
D)the prices charged when transferring goods to international divisions

Accepted Answer

Transfer prices refer to the prices that are charged for the goods or services that are transferred between different divisions of a company. These prices are often used to determine the profitability of each division and to allocate costs appropriately. Choice A is incorrect as it refers to the prices charged for distributing goods internally within the company, rather than between divisions. Choice C is incorrect as it refers to the prices charged to external customers, rather than internal transfers. Choice D is incorrect as it refers specifically to international transfers, which are just one type of transfer price.

Question 14

Which are examples of perquisites?
A)nice office and salary
B)use of a company jet and nice office
C)salary and country club memberships
D)use of company jet and wages

Accepted Answer

Perquisites, or "perks," are additional benefits or privileges given to employees beyond their salary or wages. Examples of perquisites can include the use of a company jet, membership to exclusive country clubs, or a nicer office. Choice B includes two examples of perquisites.

Question 15

Which of the following is a political or legal factor affecting performance evaluation in a multinational firm?
A)social attitude toward industry and business
B)literacy rate
C)effect of defence policy
D)currency restrictions

Accepted Answer

The effect of defence policy is a political factor that can affect the performance evaluation of a multinational firm. For example, if a company's products or services are closely tied to national security, changes in defence policies could significantly impact the company's performance evaluation. The other options (A, B, D) are not political or legal factors that directly relate to performance evaluation in a multinational firm.

Question 16

In the Ambros Company, Division A has a product that can be sold either to outside customers or to Division B. Information about these divisions is given below:
$\begin{array}{lrr}
\text { Division A: }&\text { Case } 1&\text { Case } 2\
\text { Capacity in units } & 100,000 & 100,000 \
\text { Number of units sold externally } & 100,000 & 60,000 \
\text { Market selling price } & \$ 90 & \$ 75 \
\text { Variable costs per unit } & 73 & 58 \
\text { Fixed costs per unit based on capacity } & 10 & 10\
\
\text { Division B: }\
\text {Number of units needed for production}&40,000&40,000\
 \text {Purchase price per unit from external supplier}&\$86&\$74
\end{array}$

-Refer to the figure.The company uses the opportunity cost approach to transfer pricing.What is the minimum transfer price in Case 2?
A)$58
B)$68
C)$74
D)$75

Accepted Answer

The answer of In the Ambros Company, Division A has...

Question 17

Which of the following managerial rewards is a long-term reward?
A)stock ownership
B)cash bonuses
C)stock options
D)salary

Accepted Answer

Stock ownership is a long-term reward as it provides the manager with an ownership stake in the company which can appreciate over time, serving as a long-term incentive for their performance to benefit the company's growth and profitability in the long run. Cash bonuses, stock options, and salary are all short-term or intermediate rewards.

Question 18

What is important to keep separate from the evaluation of the division?
A)the evaluation of the competition
B)the evaluation of the other division managers
C)the evaluation of the CEO
D)the evaluation of the manager of the division

Accepted Answer

The evaluation of the manager of the division should be kept separate from the evaluation of the division itself to ensure that the performance of the division is assessed on its own merits, without being influenced by perceptions of the manager's individual performance. This allows for a more objective assessment of the division's operations and outcomes.

Question 19

The Engine Division provides engines for the Tractor Division of a company. The standard unit costs for Engine Division are as follows:
$$\begin{array} { l r } 
\text { Direct materals }&\$600 \
\text { Direct labour } & 1,200 \
\text { Variable overhead } & 300 \
\text { Fixed overhead } & 150 \
\text { Market price per unit } & 2,730
\end{array}$$
-Refer to the figure. The Engine Division has excess capacity.What is the best transfer price to avoid transfer price problems?
A)$300
B)$900
C)$1,350
D)$2,100

Accepted Answer

The answer of The Engine Division provides engines for the...

Question 20

What is the term for the right to buy a certain number of shares of a company's stock at a particular price?
A)stock option
B)cash compensation
C)stock-based compensation
D)perquisite

Accepted Answer

A stock option is the right, but not the obligation, to purchase a certain number of shares of a company's stock at a particular price (the exercise price) during a specified time period. Stock options are often used as a form of employee compensation.

Quiz 10: Responsibility Accounting,performance Evaluation,and Transfer Pricing

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

It is important to separate the evaluation of a manager from the evaluation of his or her division in a multinational firm.What should be omitted from manager's evaluation?

Division A produces a component and wants to sell it to Division B.What does the transfer price represent for each division?

What is the term for the transfer price that would leave the buying division no worse off if an input is purchased from an internal division?

What managerial rewards encourage a short-term orientation?

What is the term for the transfer price that would leave the selling division no worse off if the good is sold to an internal division?

Why might it be misleading to compare the ROI of international divisions?

What are transfer prices?

Which are examples of perquisites?

Which of the following is a political or legal factor affecting performance evaluation in a multinational firm?

Which of the following managerial rewards is a long-term reward?

What is important to keep separate from the evaluation of the division?

What is the term for the right to buy a certain number of shares of a company's stock at a particular price?