Question 1

Parkside Inc.has several divisions that operate as decentralized profit centers.Parkside's Entertainment Division manufactures video arcade equipment using the products of two of Parkside's other divisions.The Plastics Division manufactures plastic components,one type that is made exclusively for the Entertainment Division,while other less complex components are sold to outside markets.The products of the Video Cards Division are sold in a competitive market;however,one video card model is also used by the Entertainment Division.The actual costs per unit used by the Entertainment Division follow: (CMA adapted)  The Plastics Division sells its commercial products at full cost plus a 25% markup and believes the proprietary plastic component made for the Entertainment Division would sell for $6.25 per unit on the open market.The market price of the video card used by the Entertainment Division is $10.98 per unit.A per-unit transfer price from the Video Cards Division to the Entertainment Division at full cost,$9.15,would:

Accepted Answer

A transfer price at full cost provides no profit incentive for the selling division to control or reduce costs, since they will only be reimbursed for their actual costs. Therefore, the Video Cards Division may not have any motivation to improve its efficiency and reduce its costs. This could result in higher costs for the company as a whole. A market-based transfer price would provide a better incentive for both divisions to control their costs and operate efficiently.

Question 2

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

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

Question 3

The Eastern division sells goods internally to the Western division of the same company.The quoted external price in industry publications from a supplier near Eastern is $200 per ton plus transportation.It costs $20 per ton to transport the goods to Western.Eastern's actual market cost per ton to buy the direct materials to make the transferred product is $100.Actual per-ton direct labor is $50.Other actual costs of storage and handling are $40.The company president selects a $220 transfer price.This is an example of: (CIA adapted)

Accepted Answer

The transfer price of $220 is based on the external market price of $200 plus the transportation cost of $20, which aligns with market-based transfer pricing.

Question 4

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 5

Cascade Cliffs,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 Cheboygan,Michigan.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 6

Parkside Inc.has several divisions that operate as decentralized profit centers.Parkside's Entertainment Division manufactures video arcade equipment using the products of two of Parkside's other divisions.The Plastics Division manufactures plastic components,one type that is made exclusively for the Entertainment Division,while other less complex components are sold to outside markets.The products of the Video Cards Division are sold in a competitive market;however,one video card model is also used by the Entertainment Division.The actual costs per unit used by the Entertainment Division follow: (CMA adapted)  The Plastics Division sells its commercial products at full cost plus a 25% markup and believes the proprietary plastic component made for the Entertainment Division would sell for $6.25 per unit on the open market.The market price of the video card used by the Entertainment Division is $10.98 per unit.Assume that the Entertainment Division is able to purchase a large quantity of video cards from an outside source at $8.70 per unit.The Video Cards Division,having excess capacity,agrees to lower its transfer price to $8.70 per unit.This action would:

Accepted Answer

By lowering the transfer price, the Video Cards Division may experience a decrease in profit in the short term; however, it would benefit Parkside Inc. as a whole by optimizing the overall profit goals. The Entertainment Division would also benefit as they would be able to purchase the video cards at a lower cost and increase their own profit margin. By selling the proprietary plastic component at $6.25 per unit on the open market, the Plastics Division would also increase their profit margin. Overall, this decision would benefit all divisions and therefore optimize the overall profit goals of Parkside Inc.

Question 7

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 8

An appropriate transfer price between two divisions of The Stark Company can be determined from the following data: (CIA adapted)  What is the natural bargaining range for the two divisions?

Accepted Answer

The answer of An appropriate transfer price between two divisions...

Question 9

The Alpha Division of a company,which is operating at capacity,produces and sells 1,000 units of a certain electronic component in a perfectly competitive market.Revenue and cost data are as follows: (CIA adapted)  The minimum transfer price that should be charged to the Beta Division of the same company for each component is:

Accepted Answer

The answer of The Alpha Division of a company,which is...

Question 10

Cascade Cliffs,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 Cheboygan,Michigan.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.

Question 11

Cascade Cliffs,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 Cheboygan,Michigan.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 its variable cost per labor-hour, which is $37.00. This is because any price lower than this would result in a loss for the repair division, and the management division's proposal of $45.00 per hour would not be beneficial for the company as a whole. Therefore, the best choice is B, as it ensures the repair division doesn't operate at a loss and still provides a reasonable price for the management division.

Question 12

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

Question 13

You have been provided with the following information for Division Sell of a decentralized company:  Division Buy would like to purchase all of its units internally.Division Buy needs 6,000 units each period and currently pays $84 per unit to an outside firm.What is the lowest price that Division Sell could accept from Division Buy? (Assume that Division Buy wants to use a sole supplier and will not purchase less than 6,000 from a supplier. )

Accepted Answer

The answer of You have been provided with the following...

Question 14

Which of the following is the most significant disadvantage of a cost-based transfer price? (CIA adapted)

Accepted Answer

A cost-based transfer price may not promote long-term efficiencies because it does not take into account the market conditions and dynamics, which could affect the pricing strategy of the company. This could result in suboptimal decision-making and may not reflect the true value of the product or service being transferred between different departments or divisions within the company.

Question 15

Given the following information for Division K:  Division L would like to purchase internally from Division K.Division L now purchases 5,000 units each period from outside suppliers at $49 per unit.Division K has ample excess capacity to handle all of Division L's needs.What is the lowest price that Division K could accept?

Accepted Answer

The answer of Given the following information for Division K:...

Question 16

A limitation of transfer prices based on actual cost is that they: (CIA adapted)

Accepted Answer

Transfer prices based on actual cost do not take into account the efficiency of the departments involved. If a department that is transferring goods is inefficient, the cost will be charged to the department that is receiving the goods, which may not be fair. Therefore, charging inefficiencies to the department that is receiving the goods is a limitation of transfer prices based on actual cost.

Question 17

Parkside Inc.has several divisions that operate as decentralized profit centers.Parkside's Entertainment Division manufactures video arcade equipment using the products of two of Parkside's other divisions.The Plastics Division manufactures plastic components,one type that is made exclusively for the Entertainment Division,while other less complex components are sold to outside markets.The products of the Video Cards Division are sold in a competitive market;however,one video card model is also used by the Entertainment Division.The actual costs per unit used by the Entertainment Division follow: (CMA adapted)  The Plastics Division sells its commercial products at full cost plus a 25% markup and believes the proprietary plastic component made for the Entertainment Division would sell for $6.25 per unit on the open market.The market price of the video card used by the Entertainment Division is $10.98 per unit.Assume that the Plastics Division has excess capacity and it has negotiated a transfer price of $5.60 per plastic component with the Entertainment Division.This price will:

Accepted Answer

The negotiated transfer price of $5.60 per plastic component is lower than the estimated sale price of $6.25 per unit on the open market. This means that the Entertainment Division is getting the component at a lower price, which will increase its profitability. The Plastics Division will also benefit from selling its excess capacity, and will have an incentive to continue producing the proprietary plastic component. As estimated profits will be shared, both divisions will be motivated to perform well. Therefore, the transfer price will motivate both divisions and is a win-win situation.

Question 18

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 optimal transfer price when operating at capacity is the market price, which is $75.

Question 19

A large manufacturing company has several autonomous divisions that sell their products in perfectly competitive external markets as well as internally to the other divisions of the company.Top management expects each of its divisional managers to take actions that will maximize the organization's goal as well as their own goals.Top management also promotes a sustained level of management effort of all of its divisional managers.Under these circumstances,for products exchanged between divisions,the transfer price that will generally lead to optimal decisions for the manufacturing company would be a transfer price equal to the: (CIA adapted)

Accepted Answer

The market price of the product is the optimal transfer price in a perfectly competitive market, as it aligns the divisional managers' decisions with the overall organization's goals by reflecting the opportunity cost of selling internally versus externally.

Question 20

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...

Quiz 15: Transfer Pricing