Question 1

The profit foregone by the seller if the products or services are transferred internally instead of selling them externally are called

Accepted Answer

The profit foregone by the seller if the products or services are transferred internally instead of selling them externally is referred to as opportunity cost. Opportunity cost is the cost of the next best alternative forgone in order to pursue a certain action. In this case, the next best alternative is selling the products or services externally, so the opportunity cost is the profit that could have been made by doing so. Additional costs, outlay costs, transfer costs, and variable costs are all different types of costs that may be incurred, but they do not refer specifically to the profit foregone in this scenario.

Question 2

Cash outflows that are directly associated with the production and transfer of the products and services are called

Accepted Answer

Outlay costs are the direct expenses incurred in the production and transfer of goods and services, including costs like labor, raw materials, equipment, and transportation. Additional costs (A) refer to expenses incurred as a result of a particular decision or action. Opportunity costs (B) refer to the cost of forgoing the next best alternative when making a decision. Transfer costs (D) typically refer to the costs associated with transferring funds between accounts or entities. Variable costs (E) are costs that vary proportionally with the quantity of output produced.

Question 3

The seller of product A has no idle capacity and can sell all it can produce at $20 per unit. Outlay cost is $4. What is the opportunity cost assuming the seller sells internally?

Accepted Answer

Opportunity cost is defined as the value of the next best alternative foregone. Since the seller has no idle capacity, if they choose to sell internally, they cannot sell to external customers at the market price of $20 per unit. Therefore, the opportunity cost of selling internally is the foregone profit of $20 per unit minus the outlay cost of $4, which is $16 per unit. Hence, the correct answer is B.

Question 4

The Transportation Division of Petrolia Paint Company can purchase paint from an independent producer at $18 per litre. The company has three divisions: Production, Transportation, and Paint. The company's Transportation Division is currently buying paint from the Paint Division for$24 per litre. Transfer prices are based on 125 percent of full cost. The market-based transfer price per litre is $12.60. Which of the following would NOT occur if the company uses dual pricing to record the Transportation Division purchases of paint from the Paint Division?

Accepted Answer

The answer of The Transportation Division of Petrolia Paint Company...

Question 5

Crush Company makes internal transfers at 180% of full cost. The Soda Refining division purchases 30,000 containers of carbonated water per day, on average, from a local supplier, who delivers the water for $30 per container via an external shipper. In order to reduce costs the company located an independent producer in Manitoba who is willing to sell 30,000 containers at $20 each, delivered to Crush Company's shipping division in Manitoba. The company's Shipping Division in Manitoba has excess capacity and can ship the 30,000 containers at a variable cost of $2.50 per container. What is the total cost of purchasing the water from the Manitoba supplier and shipping it to the Soda Division?

Accepted Answer

The cost of purchasing 30,000 containers at $20 each is:

30,000 x $20 = $600,000

The variable cost of shipping 30,000 containers at $2.50 each is:

30,000 x $2.50 = $75,000

The full cost of purchasing and shipping the water is:

$600,000 + $75,000 = $675,000

However, Crush Company makes internal transfers at 180% of full cost, so the total cost is:

$675,000 x 1.8 = $1,215,000

Therefore, the best choice is B.

Question 6

What would be the monthly operating advantage (disadvantage) of purchasing the goods internally assuming the external supplier increased its price to $50 per kilogram and the Production Division is able to utilize facilities for other operations, resulting in a monthly cash-operating savings of $30 per kilogram?

Accepted Answer

If the external supplier increased its price to $50 per kilogram and the Production Division is able to utilize facilities for other operations, the cost of producing the goods internally would be:

Internal cost = $20/kg - $30/kg cash-operating savings = -$10/kg

This means that producing the goods internally would result in a cost disadvantage of $10 per kilogram.

Assuming the company needs to produce 24,000 kilograms per month, the monthly operating disadvantage of producing the goods internally would be:

Monthly operating disadvantage = 24,000 kg x $10/kg = $240,000

Therefore, the best choice is C, with a monthly operating disadvantage of $(240,000).

Question 7

Under what conditions would transferring products or services at market prices lead to optimal decisions within the organization?

Accepted Answer

The answer of Under what conditions would transferring products or...

Question 8

The Surrey Division of Columbia Ltd. has approached the Burnaby Division and requested that it supply 25,000 units of the component at a transfer price of $150. The Burnaby Division will save $3 per unit of direct materials costs for the components manufactured for the Surrey Division. Assuming Burnaby Division has no idle capacity, what is the minimum transfer price the Burnaby Division should agree to accept?

Accepted Answer

The minimum transfer price that Burnaby Division should accept is based on the opportunity cost of selling to the Surrey Division. Since Burnaby Division has no idle capacity, it will incur an opportunity cost of giving up the contribution margin on the units that it could have produced and sold to external customers instead of selling to the Surrey Division.

The contribution margin on the units that Burnaby Division could have sold externally is calculated as follows:
Selling price = $150 + $3 = $153
Contribution margin = Selling price - Variable cost per unit = $153 - $150 = $3

Therefore, the minimum transfer price that Burnaby Division should agree to accept is $153 per unit, which is the contribution margin that it could have earned from selling externally. However, since the Surrey Division has requested a transfer price of $150, Burnaby Division would be willing to accept a transfer price that is slightly above its variable cost per unit. The variable cost per unit for Burnaby Division is $150, and it will save $3 in direct materials costs for each unit transferred to Surrey Division. Hence, the minimum transfer price that Burnaby Division should agree to accept is:

Minimum transfer price = Variable cost per unit + Savings in direct materials costs per unit = $150 + $3 = $153

Since the Surrey Division has requested a transfer price of $150 per unit, the Burnaby Division should agree to accept a slightly higher transfer price to maximize its overall contribution margin. A transfer price of $162 per unit ($150 + $12) would provide an additional $9 per unit in contribution margin ($162 - $153), and hence, maximize the overall profit for the company. Therefore, the best choice is C) $162.

Question 9

The Surrey Division of Columbia Ltd. has approached the Burnaby Division and requested that it supply 25,000 units of the component. The Burnaby Division will save $3 per unit of direct materials costs for the components manufactured for the Surrey Division. Assuming Burnaby Division has idle capacity, what is the minimum transfer price the Burnaby Division should agree to accept?

Accepted Answer

The answer of The Surrey Division of Columbia Ltd. has...

Question 10

The Surrey Division of Columbia Ltd. has approached the Burnaby Division and requested that it supply 25,000 units of the component at a transfer price of $150. Assuming Burnaby Division has no idle capacity, what is the minimum transfer price the Burnaby Division should agree to accept?

Accepted Answer

The answer of The Surrey Division of Columbia Ltd. has...

Question 11

In analyzing transfer prices

Accepted Answer

The transfer price should not be less than the incremental costs incurred to make the product. This ensures that the selling division is covering its production costs and not incurring losses. The buyer may be willing to pay more than the minimum transfer price, but it is important to establish a baseline price that covers the costs of the selling division.

Question 12

The Surrey Division of Columbia Ltd. has approached the Burnaby Division and requested that it supply 25,000 units of the component at a transfer price of $150. Assuming Burnaby Division has idle capacity, what is the minimum transfer price the Burnaby Division should agree to accept?

Accepted Answer

The answer of The Surrey Division of Columbia Ltd. has...

Question 13

When the vendor division receives full cost plus a mark-up, and the buying division pays the market price, this is referred to as

Accepted Answer

Dual pricing is a transfer pricing method where the vendor division receives full cost plus a mark-up, and the buying division pays the market price. This method ensures that both divisions are incentivized to operate efficiently, as the vendor division benefits from keeping costs low and the buying division benefits from paying a fair market price.

Question 14

The general guideline for determining the minimum transfer price is

Accepted Answer

The answer of The general guideline for determining the minimum...

Question 15

When companies are unable to choose a transfer-pricing method which meets their requirements, they may use

Accepted Answer

When companies are unable to choose a transfer-pricing method that meets their requirements, they may use dual pricing. Dual pricing involves using more than one transfer-pricing method for a single transaction, in order to balance the advantages and disadvantages of each method. This allows companies to achieve a more accurate transfer price and avoid potential conflicts with tax authorities.

Question 16

The seller of product A has idle capacity and has no alternative use for the excess capacity. The seller can sell each unit at $10. Outlay cost is $2. What is the opportunity cost of selling internally?

Accepted Answer

The opportunity cost of selling internally is the profit that could be earned if the product were sold in the external market instead. However, in this scenario, the seller has no alternative use for the excess capacity, so there is no opportunity cost. Therefore, the best choice is A, $0.

Question 17

Mar Company has two decentralized divisions, X and Y. Division X has been purchasing certain component parts from Division Y at $75 per unit. Because Division Y plans to raise the price to $100 per unit, Division X desires to purchase these parts from external suppliers for $75 per unit. The following information is available:
  Division Y annual production
  If Division X buys from an external supplier, the facilities Division Y uses to manufacture these parts will be idle. Assuming Division Y's fixed costs cannot be avoided, what is the result if Mar requires Division X to buy from Division Y at a transfer price of $100 per unit?

Accepted Answer

The answer of Mar Company has two decentralized divisions, X...

Question 18

One reason companies use full-cost transfer pricing is that it provides

Accepted Answer

Full-cost transfer pricing includes all relevant costs, including fixed costs, which may not change in the short run. This can provide accurate information for long-run decisions, but may not reflect the true cost for short-run decisions. Therefore, full-cost transfer pricing is suitable for long-run decisions, but may lead to poor short-run decisions.

Question 19

Many companies do not want to use market prices, or find it too costly, and they use ________ prices, even though sub optimal decisions may occur.

Accepted Answer

Many companies use full-cost pricing because it includes all fixed and variable costs, making it easier to ensure all costs are covered, even though it may lead to suboptimal pricing decisions compared to market-based pricing.

Question 20

Crush Company makes internal transfers at 180% of full cost. The Soda Refining division purchases 30,000 containers of carbonated water per day, on average, from a local supplier, who delivers the water for $30 per container via an external shipper. In order to reduce costs the company located an independent producer in Manitoba who is willing to sell 30,000 containers at $20 each, delivered to Crush Company's shipping division in Manitoba. The company's Shipping Division in Manitoba has excess capacity and can ship the 30,000 containers at a variable cost of $2.50 per container. What is the total cost to Crush Company if the carbonated water is purchased from the local supplier?

Accepted Answer

If Crush Company purchases from the local supplier, the total cost will be:

$30 per container x 30,000 containers per day = $900,000 per day

Since there is no information about the full cost of the carbonated water, we cannot calculate the internal transfer cost. Therefore, we cannot determine if the independent producer in Manitoba is a better choice.

Quiz 23: Transfer Pricing and Multinational Management Control Systems

The profit foregone by the seller if the products or services are transferred internally instead of selling them externally are called

Cash outflows that are directly associated with the production and transfer of the products and services are called

The seller of product A has no idle capacity and can sell all it can produce at $20 per unit. Outlay cost is $4. What is the opportunity cost assuming the seller sells internally?

Under what conditions would transferring products or services at market prices lead to optimal decisions within the organization?

The Surrey Division of Columbia Ltd. has approached the Burnaby Division and requested that it supply 25,000 units of the component at a transfer price of $150. Assuming Burnaby Division has no idle capacity, what is the minimum transfer price the Burnaby Division should agree to accept?

In analyzing transfer prices

The Surrey Division of Columbia Ltd. has approached the Burnaby Division and requested that it supply 25,000 units of the component at a transfer price of $150. Assuming Burnaby Division has idle capacity, what is the minimum transfer price the Burnaby Division should agree to accept?

When the vendor division receives full cost plus a mark-up, and the buying division pays the market price, this is referred to as

The general guideline for determining the minimum transfer price is

When companies are unable to choose a transfer-pricing method which meets their requirements, they may use

The seller of product A has idle capacity and has no alternative use for the excess capacity. The seller can sell each unit at $10. Outlay cost is $2. What is the opportunity cost of selling internally?

One reason companies use full-cost transfer pricing is that it provides

Many companies do not want to use market prices, or find it too costly, and they use ________ prices, even though sub optimal decisions may occur.