Question 1

A transfer made at cost does not motivate the selling division to transfer its goods or services internally.There is no profit for the selling division.

Accepted Answer

If the transfer is made at cost, the selling division does not make a profit and therefore may not be motivated to transfer its goods or services internally.

Question 2

In the United States,more companies use cost-based transfer prices than market-based transfer prices.Numerous surveys have shown this to be true.

Accepted Answer

This statement is true and has been demonstrated through various surveys.

Question 3

Transfer prices cannot be used for decision making,product costing,or performance evaluation.Transfer pricing is used in decision making,product costing,and performance evaluation.

Accepted Answer

Transfer prices can be used for decision making, product costing, and performance evaluation. Transfer pricing is the pricing of goods and services that are transferred between different divisions or entities within the same company. It is used to determine the cost of goods or services for each division, and to evaluate the performance of each division based on its profitability. Transfer prices are also used to make decisions about production and pricing strategies, and to allocate resources within the company. Therefore, transfer prices are an important tool for decision making, product costing, and performance evaluation.

Question 4

A market price-based transfer price policy allows the selling division to determine the price for transfers between divisions within the same organization.The market determines the price,not the division.

Accepted Answer

The answer of A market price-based transfer price policy allows...

Question 5

A perfect intermediate market exists if buyers can buy and sellers can sell outside of the organization.A perfect market exists when buyers and sellers can have unlimited transactions with no impact on prices.

Accepted Answer

A perfect market exists when there is perfect competition, where there are many buyers and sellers who have perfect information, no barriers to entry, and homogeneous products. In such a market, any transaction by a buyer or seller can impact the market price. A perfect intermediate market, on the other hand, refers to a market outside of an organization where buyers and sellers can freely transact without any influence from the organization's policies or regulations.

Question 6

From an organization's viewpoint,transfer prices have no effect on total profits assuming the transfer occurs between the two responsibility centers.Total profits are unaffected,divisional profits will have effects but they off-set.

Accepted Answer

The answer of From an organization's viewpoint,transfer prices have no...

Question 7

In general,the optimal transfer price for a division is the sum of its outlay costs and the opportunity cost of not transferring its goods to another division.It is the opportunity cost of the resource at the point of the transfer.Normally this is the lost contribution by not selling outside.

Accepted Answer

The answer of In general,the optimal transfer price for a...

Question 8

Tax avoidance is unethical when inflated transfer prices are used in international transactions to shift profits from a division in one country to a division in another country.The key is "inflated" prices.Market based prices would not be unethical.

Accepted Answer

Tax avoidance using inflated transfer prices is considered unethical as it involves deliberately manipulating prices to shift profits and avoid taxes. However, using market-based prices is a legitimate practice and is not considered unethical.

Question 9

The GAAP financial reporting rules for segments require that all companies use transfer prices based on market prices.GAAP does not specify what method must be used for transfer pricing except for the oil and gas industry.

Accepted Answer

GAAP does not require the use of transfer prices based on market prices for all companies. It allows companies to use any reasonable method for transfer pricing as long as it is applied consistently. The only exception is for the oil and gas industry, where GAAP does provide specific guidelines for transfer pricing.

Question 10

The use of an optimal transfer price eliminates potential conflicts between an organization's interests and the divisional manager's interest.Conflicts may be reduced,but will not be eliminated.

Accepted Answer

The answer of The use of an optimal transfer price...

Question 11

A transfer price is the value assigned to the transfer of goods or services between divisions within the same organization.This is the definition of transfer pricing.

Accepted Answer

The statement accurately defines transfer pricing as the value assigned to the transfer of goods or services between divisions within the same organization.

Question 12

A selling division at capacity is indifferent between selling to outsiders and transferring inside at the market price.The profit would be the same in either case.

Accepted Answer

When a selling division is at capacity, there is no opportunity cost to selling to outsiders versus transferring internally at the market price. Therefore, the profit would be the same in either case and the division would be indifferent between the two options.

Question 13

Transfer prices are not used to record the exchange between two cost centers within the same organization.Transfer prices are used for profit and investment centers.Cost centers are not concerned with profits.

Accepted Answer

Cost centers are responsible for managing and controlling their costs, while profit and investment centers are responsible for generating profits and managing investments. Therefore, transfer prices are mainly used between profit and investment centers, not cost centers.

Question 14

When actual costs are used as the basis for a transfer,inefficiencies of the selling division are transferred to the buying division.The selling division has no incentive to minimize the inefficiencies since they can all be passed on.

Accepted Answer

This statement is true because when actual costs are used for transfer pricing, the selling division can pass on any inefficiencies to the buying division. This would lead to a situation where the selling division does not have to worry about minimizing inefficiencies, as they can all be passed on to the buying division.

Question 15

An organization that has significant foreign operations must disclose how its transfer prices are established between domestic and foreign divisions.This is a requirement of GAAP.

Accepted Answer

This is a requirement of GAAP under ASC 830-10-50.

Question 16

In general,negotiated transfer prices fall in a range between the selling division's differential costs and the buying division's market price.The seller's differential costs are the lowest the seller would accept;the buyer's market price is the highest the buyer would be willing to pay.

Accepted Answer

This statement accurately describes the range of negotiated transfer prices. The seller's differential costs represent their minimum acceptable price, while the buyer's market price represents their maximum willingness to pay. The final transfer price will fall within this range, reflecting a mutually beneficial agreement between the two divisions.

Question 17

If an intermediate market exists but divisions are prohibited from buying or selling from the outside,the intermediate market can be ignored in determining the optimal transfer price.Since the divisions are prohibited,the outside price is irrelevant.

Accepted Answer

If divisions are prohibited from buying or selling from the outside, then the intermediate market becomes irrelevant, and the optimal transfer price can be determined without considering it. The outside price is not a factor in this scenario.

Question 18

In interstate transactions,transfers can reduce an organization's tax liability when the selling division is in a lower tax jurisdiction than the buying division.The transfers can in effect move profits from one jurisdiction to another.

Accepted Answer

Transfers can indeed move profits from one jurisdiction to another, resulting in a lower tax liability for the organization if the selling division is in a lower tax jurisdiction than the buying division.

Question 19

When a perfect intermediate market exists,the optimal transfer price is the intermediate market price.In a perfect market,the market price is optimal.

Accepted Answer

In a perfect intermediate market, the market price is the equilibrium price where supply and demand intersect. Therefore, using this price as the transfer price would result in optimal outcomes for both the buyer and seller. Similarly, in a perfect market, the market price is also the equilibrium price, so using this price as the transfer price would also result in optimal outcomes for both parties.

Question 20

If a transfer has no effect on divisional profit,risk-neutral managers will be indifferent between making the transfer or not.Since there is no effect on profit,there is no risk.

Accepted Answer

Since the transfer has no effect on profit, there is no risk involved and risk-neutral managers would be indifferent between making the transfer or not.

Quiz 15: Transfer Pricing