Question 1

When the selling division in an internal transfer has unsatisfied demand from outside customers for the product that is being transferred,then the lowest acceptable transfer price as far as the selling division is concerned is:

Accepted Answer

The lowest acceptable transfer price for the selling division would be the market price charged to outside customers less any costs saved by transferring internally. This is because the selling division could sell the product to an outside customer at the market price and earn a higher profit margin. Therefore, the transfer price needs to be lower than the market price to provide incentive for the purchasing division to buy from the selling division rather than purchasing from an outside supplier.

Question 2

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

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

Question 3

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

Accepted Answer

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

Question 4

The Raisin Division of Trail Mix Foods,Inc.had the following operating results last year:
$$\begin{array} { | l | r | } 
\hline \text { Sales } ( 150,000 \text { pounds of raisins) } & \$ 60,000 \
\hline \text { Variable expenses } & 37,500 \
\hline \text { Contribution margin } & 22,500 \
\hline \text { Fixed expenses } & 12,000 \
\hline \text { Profit } & \$ 10,500 \
\hline
\end{array}$$ Raisin expects identical operating results this year.The Raisin Division has the ability to produce and sell 200,000 pounds of raisins annually.Assume that the Peanut Division of Trail Mix Foods wants to purchase an additional 20,000 pounds of raisins from the Raisin Division.Raisin will be able to increase its profit by accepting any transfer price above:

Accepted Answer

The correct answer is A because the variable cost per pound is $0.25 ($37,500 / 150,000 pounds). Any transfer price above this amount will increase the Raisin Division's profit.

Question 5

Division X makes a part that it sells to customers outside of the company.Data concerning this part appear below: 
$$\begin{array} { | l | r | } 
\hline \text { Selling price to outside } & \$ 50 \
\text { customers } &  \
\hline \text { Variable cost per unit } &\$ 30 \
\hline \text { Total fixed costs } &   \$ 400,000\
\hline \text { Capacity in units } & 25,000\
\hline
\end{array}$$ Division Y of the same company would like to use the part manufactured by Division X in one of its products.Division Y currently purchases a similar part made by an outside company for $49 per unit and would substitute the part made by Division X.Division Y requires 5,000 units of the part each period.Division X has ample excess capacity to handle all of Division Y's needs without any increase in fixed costs and without cutting into outside sales.According to the formula in the text,what is the lowest acceptable transfer price from the standpoint of the selling division?

Accepted Answer

The answer of Division X makes a part that it...

Question 6

Part 43X costs the Southern Division of Norris Corporation $26 to make - direct materials are $10,direct labor is $4,variable manufacturing overhead is $9,and fixed manufacturing overhead is $3.Southern Division sells Part 43X to other companies for $30.The Northern Division of Norris Corporation can use Part 43X in one of its products.The Southern Division has enough idle capacity to produce all of the units of Part 43X that the Northern Division would require.What is the lowest transfer price at which the Southern Division should be willing to sell Part 43X to the Northern Division?

Accepted Answer

The lowest transfer price at which the Southern Division should be willing to sell Part 43X to the Northern Division is the variable cost of producing the product plus any opportunity cost. The variable cost of producing Part 43X is $10 + $4 + $9 = $23. Since the Southern Division has idle capacity, there is no opportunity cost associated with producing this product, so the lowest transfer price should be $23. Selling at a price lower than $23 would result in a loss for the Southern Division. Selling at a higher price would benefit the Southern Division but would not be a cost-effective choice for the Northern Division. Therefore, the best choice is C.

Question 7

The Raisin Division of Trail Mix Foods,Inc.had the following operating results last year:
$$\begin{array} { | l | r | } 
\hline \text { Sales } ( 150,000 \text { pounds of raisins) } & \$ 60,000 \
\hline \text { Variable expenses } & 37,500 \
\hline \text { Contribution margin } & 22,500 \
\hline \text { Fixed expenses } & \underline{12,000} \
\hline \text { Profit } & \$ 10,500 \
\hline
\end{array}$$ Raisin expects identical operating results this year.The Raisin Division has the ability to produce and sell 200,000 pounds of raisins annually.Assume that the Raisin Division is currently operating at its capacity of 200,000 pounds of raisins.Also assume again that the Peanut Division wants to purchase an additional 20,000 pounds of raisins from the Raisin Division.Under these conditions,what amount per pound of raisins would the Raisin Division have to charge Peanut in order to maintain its current profit?

Accepted Answer

To maintain the current profit, the Raisin Division must cover the variable cost per pound ($37,500/150,000 = $0.25) and the lost contribution margin per pound ($22,500/150,000 = $0.15). Therefore, the price per pound should be $0.25 + $0.15 = $0.40.

Question 8

Dockside Enterprises Inc. ,operates two divisions: (1)a management division that owns and manages bulk carriers on the Great Lakes and (2)a repair division that operates a dry dock in Tampa,Florida.The repair division works on company ships,as well as other large-hull ships.The repair division has an estimated variable cost of $37 per labor-hour.The repair division has a backlog of work for outside ships.They charge $70.00 per hour for labor,which is standard for this type of work.The management division complained that it could hire its own repair workers for $45.00 per hour,including leasing an adequate work area.What is the minimum transfer price per hour that the repair division should obtain for its services,assuming it is operating at capacity?

Accepted Answer

The minimum transfer price should be the opportunity cost of using the repair division's capacity, which is the price they could charge external customers, $70.00 per hour, since they are operating at full capacity.

Question 9

Which of the following responsibility centers is affected by the use of market-based transfer prices?

Accepted Answer

Market-based transfer prices are used between profit centers or divisions within an organization, as they are based on market rates for similar goods or services. Therefore, the use of market-based transfer prices affects the performance and profitability of the profit center. Cost centers are not affected by transfer prices as they do not generate revenue, revenue centers do not make transfers, and production centers may be affected by transfer prices but are not directly involved in their calculation.

Question 10

Dockside Enterprises Inc. ,operates two divisions: (1)a management division that owns and manages bulk carriers on the Great Lakes and (2)a repair division that operates a dry dock in Tampa,Florida.The repair division works on company ships,as well as other large-hull ships.The repair division has an estimated variable cost of $37 per labor-hour.The repair division has a backlog of work for outside ships.They charge $70.00 per hour for labor,which is standard for this type of work.The management division complained that it could hire its own repair workers for $45.00 per hour,including leasing an adequate work area.If the repair division had idle capacity,what is the minimum transfer price that the repair division should obtain?

Accepted Answer

The minimum transfer price that the repair division should obtain is the variable cost per labor-hour, which is $37. This is because if the repair division charges anything lower than their variable cost, they will incur losses. Moreover, the management division can already hire their own repair workers for $45, so anything higher than that would not make sense for them to pay to the repair division. However, charging the standard rate of $70 is not necessary since the repair division already has idle capacity and can afford to sell their services at a lower price.

Question 11

The Gear Division makes a part with the following characteristics: 
$$\begin{array} { | l | r | } 
\hline \text { Production capacity } & 25,000 \text { units } \
\hline \text { Selling price to outside customers } & \$ 18 \
\hline \text { Variable cost per unit } & \$ 11 \
\hline \text { Fixed cost, total } & \$ 100,000 \
\hline
\end{array}$$Motor Division of the same company would like to purchase 10,000 units each period from the Gear Division.The Motor Division now purchases the part from an outside supplier at a price of $17 each.Suppose the Gear Division has ample excess capacity to handle all of the Motor Division's needs without any increase in fixed costs and without cutting into sales to outside customers.If the Gear Division refuses to accept the $17 price internally and the Motor Division continues to buy from the outside supplier,the company as a whole will be:

Accepted Answer

The answer of The Gear Division makes a part with...

Question 12

Which of the following statements is(are)false? (A)From an organization's viewpoint,transfer prices have no effect on total profits assuming the transfer occurs between the two responsibility centers.(B)A transfer price is the value assigned to the transfer of goods or services between divisions within the same organization.

Accepted Answer

Transfer prices do not affect the total profits of an organization as they are internal transactions. A transfer price is indeed the value assigned to internal transfers, so both statements are true.

Question 13

Dockside Enterprises Inc. ,operates two divisions: (1)a management division that owns and manages bulk carriers on the Great Lakes and (2)a repair division that operates a dry dock in Tampa,Florida.The repair division works on company ships,as well as other large-hull ships.The repair division has an estimated variable cost of $37 per labor-hour.The repair division has a backlog of work for outside ships.They charge $70.00 per hour for labor,which is standard for this type of work.The management division complained that it could hire its own repair workers for $45.00 per hour,including leasing an adequate work area.What is the maximum transfer price per hour that the management division should pay?

Accepted Answer

The maximum transfer price the management division should pay is $45.00 per hour, as this is the cost they would incur if they hired their own repair workers and leased a work area.

Question 14

You have been provided with the following information for Division X of a decentralized company: 
$$\begin{array} { | l | r | } 
\hline \text { Selling price } & \$ 90 \
\hline \text { Variable cost per unit } & 66 \
\hline \text { Fixed costper unit } & 20 \
\hline \text { Sales volume (units) } & 22,500 \
\hline \text { Capacity (units) } & 26,000 \
\hline
\end{array}$$Division Y of the same company would like to purchase all of its units internally.Division Y needs 6,000 units each period and currently pays $84 per unit to an outside firm.What is the lowest price that Division X could accept from Division Y? (Assume that Division Y wants to use a sole supplier and will not purchase less than 6,000 from a supplier. )

Accepted Answer

For Division Y, the current cost of buying 6,000 units from an outside firm is $84 per unit. So, the total cost of buying 6,000 units will be 6,000 x $84 = $504,000.
For Division X, the lowest price that they can accept from Division Y will be the cost that is lower than $504,000 but still covers their costs and allows them to make a profit. Assuming that Division X wants to make a profit of at least $1 per unit, then the total cost for Division Y will be 6,000 x ($84 - $1) = $498,000.
So, the lowest price that Division X could accept from Division Y would be $498,000 / 6,000 units = $83 per unit. Since $80 is lower than $83, the answer is C.

Question 15

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 16

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

Accepted Answer

The opportunity cost of an internal transfer is equal to the variable manufacturing cost per unit, which is $50 in this case since Division A is operating at capacity. The market price is $75, which means if Division A were to sell the unit externally, they would receive an additional $25 ($75 - $50) per unit. Therefore, the opportunity cost of an internal transfer is $25, which is the best choice, represented by answer choice B.

Question 17

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

Accepted Answer

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

Question 18

Transfer prices would not be used by:

Accepted Answer

Cost centers are responsible for incurring costs and do not generate revenue or profit. Therefore, transfer prices are not relevant to cost centers. Production centers, investment centers, and profit centers are all responsible for generating revenue or profit, and may use transfer prices to allocate costs or determine performance.

Question 19

The Wheel Division of Frankov Corporation has the capacity for making 75,000 wheel sets per year and regularly sells 60,000 each year on the outside market.The regular sales price is $100 per wheel set,and the variable production cost per unit is $65.The Retail Division of Frankov Corporation currently buys 30,000 wheel sets (of the kind made by the Wheel Division)yearly from an outside supplier at a price of $90 per wheel set.If the Retail Division were to buy the 30,000 wheel sets it needs annually from the Wheel Division at $87 per wheel set,the change in annual net operating income for the company as a whole,compared to what it is currently,would be:

Accepted Answer

Currently, the Wheel Division produces 75,000 wheel sets but sells only 60,000 on the outside market. This means that the division has excess capacity of 15,000 units that can be sold to the Retail Division for $87 per unit.

Selling 30,000 units to the Retail Division at $87 per unit would generate additional revenue of $2,610,000 (($87 - $65) x 30,000)). However, this would result in lost sales of 30,000 units on the outside market, which represents a revenue loss of $3,000,000 (30,000 units x $100 per unit).

Therefore, the change in total annual revenue would be a net loss of $390,000. However, the company would save $300,000 in purchasing costs by buying from its own Wheel Division instead of an outside supplier.

Thus, the net change in annual operating income for the company as a whole would be an increase of $90,000 ($300,000 - $390,000), which is option B.

Question 20

Division A has variable manufacturing costs of $50 per unit and fixed costs of $10 per unit.Assuming that 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