Question 1

Full-cost transfer prices are adequate and lead to goal congruence for decisions that require knowledge of short-run variable costs.

Accepted Answer

Full-cost transfer prices include both fixed and variable costs, which may not be relevant for short-run decisions. This can lead to suboptimal decisions and may not achieve goal congruence. Short-run decisions should use variable cost transfer prices instead.

Question 2

The Transportation Division of Petrolia Paint Company can purchase paint from an independent producer at $12.60 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.Which of the following would occur if the company uses dual pricing to record the Transportation Division purchases of paint from the Paint Division?
A)debit the Paint Division for $24.00
B)credit the corporate cost account for $11.40
C)debit the Transportation Division for $12.60
D)credit the Paint Division for $12.60
E)credit the Paint Division for $32.40

Accepted Answer

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

Question 3

Full-cost transfer pricing may be used because it yields relevant costs for short-run decisions even though full-cost allocations may lead to poor long-run decisions.

Accepted Answer

The answer of Full-cost transfer pricing may be used because...

Question 4

Cash outflows that are directly associated with the production and transfer of the products and services are called
A)additional costs.
B)opportunity costs.
C)outlay costs.
D)transfer costs.
E)variable costs.

Accepted Answer

Outlay costs are the costs that are directly associated with the production and transfer of products and services, such as the cost of materials, labor, and other expenses. The cost of purchasing cushion stuffing from external suppliers would fall under this category, as would the variable and fixed costs presented by the Production Division manager in attempting to persuade the Assembly Division to purchase internally.

Question 5

The profit foregone by the seller if the products or services are transferred internally instead of selling them externally are called
A)additional costs.
B)opportunity costs.
C)outlay costs.
D)transfer costs.
E)variable costs.

Accepted Answer

The concept of opportunity cost refers to the profit that the seller could have earned if they had sold the product or service externally instead of transferring it internally. Therefore, option B is the correct choice. Option A (additional costs) refers to costs that would be incurred if the product or service was sold externally, such as transportation or marketing costs. Option C (outlay costs) refers to actual expenses incurred by the seller, such as materials or labor costs. Option D (transfer costs) refers to the costs associated with transferring goods from one department or location to another within a company. Option E (variable costs) refers to costs that vary with the level of output, such as materials or labor costs. None of these options reflect the concept of opportunity cost described in the question, making option B the correct answer.

Question 6

Use the information below to answer the following question(s).
Soft Cushion Company is highly decentralized.Each division is empowered to make its own sales decisions.The Assembly Division can purchase cushion stuffing from the Production Division or from external suppliers.The Production Division has been the major supplier of stuffing in recent years.The Assembly Division has announced that two external suppliers will be used to purchase the stuffing at $20 per kilogram for the next year.The Production Division recently increased its unit price to $40.The manager of the Production Division presented the following information;variable cost $32,fixed cost $8,to top management in order to attempt to force the Assembly Division to purchase the stuffing internally.The Assembly Division purchases 20,000 kg per month.
-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?
A)$1,000,000
B)$360,000
C)$(240,000)
D)$(400,000)
E)$(640,000)

Accepted Answer

If the Assembly Division purchases the stuffing internally, they would pay $40 per kilogram, which is $10 more than the external supplier's increased price of $50 per kilogram. However, the Production Division would receive a variable cost of $32 per kilogram and a cash-operating savings of $30 per kilogram, resulting in a net cost of $2 per kilogram. Therefore, the monthly operating disadvantage of purchasing externally would be ($20-$2) x 20,000 kg = -$360,000. Thus, the best choice would be for the Assembly Division to continue purchasing internally at a cost of $40 per kilogram.

Question 7

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?
A)$0
B)$8
C)$10
D)$12
E)$16

Accepted Answer

Opportunity cost is the benefit that is foregone by choosing one alternative over another. In this case, since the seller has no alternative use for the excess capacity, the opportunity cost of selling internally is zero. The seller is not forgoing any benefit by choosing to sell internally.

Question 8

There is seldom a single transfer price that simultaneously meets the criteria of goal congruence,management effort,and subunit autonomy.

Accepted Answer

This statement is true. Goal congruence, management effort, and subunit autonomy are often competing goals in choosing a transfer pricing method. It is difficult to find a single transfer price that satisfies all three criteria simultaneously.

Question 9

Under what conditions would transferring products or services at market prices lead to optimal decisions within the organization?
A)when the immediate market is a monopoly
B)when there is interdependence between subunit divisions
C)when there is excess capacity
D)when the immediate market is not perfectly competitive,and there is interdependence between subunit divisions
E)when the immediate market is only somewhat competitive and there is excess capacity

Accepted Answer

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

Question 10

Opportunity costs represent the cash flows directly associated with the production and transfer of the products and services.

Accepted Answer

Opportunity costs represent the benefits foregone from pursing an alternative use of resources, not just the cash flows directly associated with production and transfer.

Question 11

Use the information below to answer the following question(s).
Soft Cushion Company is highly decentralized.Each division is empowered to make its own sales decisions.The Assembly Division can purchase cushion stuffing from the Production Division or from external suppliers.The Production Division has been the major supplier of stuffing in recent years.The Assembly Division has announced that two external suppliers will be used to purchase the stuffing at $20 per kilogram for the next year.The Production Division recently increased its unit price to $40.The manager of the Production Division presented the following information;variable cost $32,fixed cost $8,to top management in order to attempt to force the Assembly Division to purchase the stuffing internally.The Assembly Division purchases 20,000 kg per month.
-The Production Division has no alternative use for the facilities used to manufacture the stuffing.What is the monthly operating income advantage (disadvantage)if the goods are purchased internally?
A)$400,000
B)$640,000
C)$240,000
D)$(240,000)
E)$(400,000)

Accepted Answer

If the Assembly Division purchases the stuffing internally at $40 per kilogram, the cost for 20,000 kg would be $800,000. 
If the Assembly Division purchases the stuffing externally at $20 per kilogram, the cost for 20,000 kg would be $400,000. 
The variable cost for the Production Division to produce 20,000 kg of stuffing is $32 per kilogram, which amounts to a total of $640,000. 
Therefore, the monthly operating income advantage of purchasing externally is: 
$800,000 - $400,000 = $400,000 
And the monthly operating income advantage of purchasing internally is: 
$800,000 - $640,000 = $160,000 
Since the Assembly Division can save $400,000 by purchasing externally, it is the best choice.

Question 12

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?
A)$4
B)$16
C)$20
D)$24
E)$44

Accepted Answer

The opportunity cost is the value of the next best alternative forgone. In this case, if the seller were to sell internally, they would be giving up the opportunity to sell it externally for $20 per unit. Therefore, the opportunity cost is $20 - $4 = $16 per unit. The best choice is B.

Question 13

In analyzing transfer prices
A)the buyer will not willingly purchase a product for less than the incremental costs incurred to manufacture the product internally.
B)the seller should not sell a product for less than the incremental costs incurred to make the product.
C)the buyer will willingly pay more than the ceiling transfer price.
D)the buyer will not pay less than the ceiling transfer price.
E)the buyer will not pay the incremental costs.

Accepted Answer

In analyzing transfer prices, it is important to ensure that the seller should not sell a product for less than its incremental costs as this would result in losses for the company. However, the buyer may be unwilling to pay a price above the ceiling transfer price, which is the maximum price that the buyer is willing to pay. Therefore, it is necessary to find a transfer price that is acceptable to both the buyer and the seller, and which reflects the market value of the product.

Question 14

The general guideline for determining the minimum transfer price is
A)cover all employee costs incurred in production.
B)fixed cost plus opportunity costs per unit to the vendor division.
C)variable cost plus opportunity costs per unit to the vendor division.
D)fixed cost plus incremental costs per unit up to the point of transfer.
E)additional incremental costs per unit up to the point of transfer,plus opportunity costs per unit to the vendor division.

Accepted Answer

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

Question 15

The general guideline for setting a minimum transfer price adds the full cost plus the opportunity cost to arrive at the minimum transfer price.

Accepted Answer

The answer of The general guideline for setting a minimum...

Question 16

Dual pricing is widely used as it reduces the goal-congruence problems associated with a pure cost-plus based transfer-pricing method.

Accepted Answer

The answer of Dual pricing is widely used as it...

Question 17

Use the information below to answer the following question(s).
Soft Cushion Company is highly decentralized.Each division is empowered to make its own sales decisions.The Assembly Division can purchase cushion stuffing from the Production Division or from external suppliers.The Production Division has been the major supplier of stuffing in recent years.The Assembly Division has announced that two external suppliers will be used to purchase the stuffing at $20 per kilogram for the next year.The Production Division recently increased its unit price to $40.The manager of the Production Division presented the following information;variable cost $32,fixed cost $8,to top management in order to attempt to force the Assembly Division to purchase the stuffing internally.The Assembly Division purchases 20,000 kg per month.
-What is the monthly operating advantage (disadvantage)of purchasing the goods internally assuming the Production Division is able to utilize the facilities for other operations resulting in monthly cash-operating savings of $40,000?
A)$440,000
B)$40,000
C)$280,000
D)$(280,000)
E)$(360,000)

Accepted Answer

If the Assembly Division purchases the stuffing internally, they will have to pay $40 per kilogram, resulting in a cost of $800,000 (20,000 kg x $40/kg). If they purchase externally, they will only pay $20 per kilogram, resulting in a cost of $400,000 (20,000 kg x $20/kg). Therefore, the operating disadvantage of purchasing internally is $400,000.

However, if the Production Division is able to utilize their facilities for other operations resulting in monthly cash-operating savings of $40,000, this should be subtracted from the operating disadvantage of purchasing internally. The monthly operating disadvantage, in this case, would be:

$400,000 - $40,000 = $360,000

Therefore, the best choice is to purchase externally, as it results in a lower cost for the Assembly Division.

Question 18

If the product sold between divisions has no intermediate market,the opportunity cost of supplying the product internally is the variable cost of the product.

Accepted Answer

The answer of If the product sold between divisions has...

Question 19

Use the information below to answer the following question(s).
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 can ship the 30,000 containers at a variable cost of $2.50 per container and a full cost,based on practical capacity,of $4.00 per container.When the company's Manitoba shipping division ships for external customers is charges $6.00 per container.
-What is the total cost to Crush Company if the carbonated water is purchased from the local supplier?
A)$900,000
B)$1,200,000
C)$975,000
D)$1,080,000
E)$1,620,000

Accepted Answer

The cost of purchasing from the local supplier:
30,000 containers/day * $30/container = $900,000/day

Since no other costs are mentioned in relation to purchasing from the local supplier, this is the total cost to Crush Company.

Question 20

Some companies use dual pricing,using two separate transfer-pricing methods to price each interdivisional transaction.

Accepted Answer

Some companies use two separate transfer-pricing methods to price interdivisional transactions, which is known as dual pricing.

Quiz 21: Transfer Pricing and Multinational Management Control Systems

Full-cost transfer prices are adequate and lead to goal congruence for decisions that require knowledge of short-run variable costs.

Full-cost transfer pricing may be used because it yields relevant costs for short-run decisions even though full-cost allocations may lead to poor long-run decisions.

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

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

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?

There is seldom a single transfer price that simultaneously meets the criteria of goal congruence,management effort,and subunit autonomy.

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

Opportunity costs represent the cash flows directly associated with the production and transfer of the products and services.

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?

In analyzing transfer prices

The general guideline for determining the minimum transfer price is

The general guideline for setting a minimum transfer price adds the full cost plus the opportunity cost to arrive at the minimum transfer price.

Dual pricing is widely used as it reduces the goal-congruence problems associated with a pure cost-plus based transfer-pricing method.

If the product sold between divisions has no intermediate market,the opportunity cost of supplying the product internally is the variable cost of the product.

Some companies use dual pricing,using two separate transfer-pricing methods to price each interdivisional transaction.