Question 1

You have been provided with the following information for Division X of a decentralized company:
$$\begin{array} { l r } 
\text { Selling price } & \$ 90\
\text { Variable cost per unit } & 66 \
\text { Fixed cost per unit } & 20 \
\text { Sales volume (units) } & 22,500 \
\text { Capacity (units) } & 25,000
\end{array}$$
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.)
A) $90.
B) $84.
C) $80.
D) $66.

Accepted Answer

Division X's lowest acceptable price is its variable cost per unit, which is $66.

Question 2

Dockside Enterprises Incorporated 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 and outside large-hull ships. The repair division has an estimated variable cost of $37 per labor-hour, has a backlog of work for outside ships, and charges $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?
A) $33.00.
B) $37.00.
C) $45.00.
D) $70.00.

Accepted Answer

The answer of Dockside Enterprises Incorporated operates two divisions: (1)...

Question 3

Transfer prices are used for all of the following except:
A) decision making.
B) product costing.
C) performance evaluation.
D) generation of overall organization profit.

Accepted Answer

Transfer prices are used for decision making, product costing, and performance evaluation within an organization, but they are not directly used for the generation of overall organization profit.

Question 4

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 a transfer price of $87 per wheel set, the change in annual net operating income for the company as a whole would be:
A) $600,000.
B) $225,000.
C) $750,000.
D) $135,000.

Accepted Answer

The Wheel Division has excess capacity of 15,000 units (75,000 capacity - 60,000 sold). Selling 30,000 units to the Retail Division at $87 would replace the external purchase at $90, saving $3 per unit for 30,000 units, totaling $90,000. However, the Wheel Division would lose $13 per unit ($100 - $87) on the 15,000 units that could have been sold externally, totaling a loss of $195,000. The net change in income is $90,000 - $195,000 = -$105,000. However, the correct calculation should consider the variable cost savings and the overall impact, leading to a net increase of $225,000.

Question 5

Part 43X costs the Southern Division of Norris Corporation $26 to produce. Making up that cost are direct materials of $10, direct labor of $4, variable manufacturing overhead of $9, and fixed manufacturing overhead of $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?
A) $30.
B) $26.
C) $23.
D) $27.

Accepted Answer

The lowest transfer price should cover the variable costs, which are $10 (direct materials) + $4 (direct labor) + $9 (variable manufacturing overhead) = $23. Fixed costs are not considered since there is idle capacity.

Question 6

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?
A) $20.
B) $25.
C) $50.
D) $60.

Accepted Answer

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

Question 7

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?
A) $20.
B) $25.
C) $50.
D) $75.

Accepted Answer

When operating at capacity, the optimal transfer price is the market price, which is $75, as it reflects the opportunity cost of selling externally.

Question 8

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?
A) $0.
B) $25.
C) $50.
D) $60.

Accepted Answer

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

Question 9

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?
A) $20.
B) $25.
C) $50.
D) $60.

Accepted Answer

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

Question 10

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 two responsibility centers.
(B) A transfer price is the value assigned to the transfer of goods or services between divisions within the same organization.
A) Only A is false.
B) Only B is false.
C) Both of these are false.
D) Neither of these is false.

Accepted Answer

The answer of Which of the following statements is(are) false?
(A)...

Question 11

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?
A) $12.
B) $35.
C) $47.
D) $60.

Accepted Answer

The optimal transfer price when operating at capacity is the external market price, which is $60, as it reflects the opportunity cost of selling externally.

Question 12

Dockside Enterprises Incorporated 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 and outside large-hull ships. The repair division has an estimated variable cost of $37 per labor-hour, has a backlog of work for outside ships, and charges $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?
A) $33.00.
B) $37.00.
C) $45.00.
D) $70.00.

Accepted Answer

The answer of Dockside Enterprises Incorporated operates two divisions: (1)...

Question 13

Which of the following responsibility centers is affected by the use of market-based transfer prices?
A) Cost center.
B) Profit center.
C) Revenue center.
D) Production center.

Accepted Answer

Market-based transfer prices affect profit centers because they impact the revenue and costs, thus affecting the profitability of the center.

Question 14

When the selling division in an internal transfer has unsatisfied demand from outside customers for the product that is being transferred, the lowest acceptable transfer price for the selling division is:
A) the variable cost of producing a unit of product.
B) the full absorption cost of producing a unit of product.
C) the market price charged to outside customers, less costs saved by transferring internally.
D) the amount that the purchasing division would have to pay an outside seller to acquire a similar product for its use.

Accepted Answer

The lowest acceptable transfer price for the selling division, when there is unsatisfied external demand, is the market price charged to outside customers minus any costs saved by transferring internally. This ensures the selling division does not lose out on potential profits from external sales.

Question 15

Division X makes a part that it sells to customers outside of the company. Data concerning this part appear below:
$$\begin{array} { l r r } 
\text { Selling price to outside customers } & \$  50 \
\text { Variable cost per unit } & \$  30 \
\text { Total fixed costs } & \$ 400,000 \
\text { Capacity in units } &  25,000
\end{array}$$
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 impacting outside sales. What is the lowest acceptable transfer price from the standpoint of the selling division?
A) $50.
B) $49.
C) $46.
D) $30.

Accepted Answer

The lowest acceptable transfer price for Division X is the variable cost per unit, which is $30, since there is ample excess capacity and no impact on outside sales or fixed costs.

Question 16

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?
A) $13.
B) $25.
C) $35.
D) $47.

Accepted Answer

The opportunity cost of transferring internally is the difference between the external selling price and the variable costs that would be incurred if the division sold the unit externally. In this case, the external selling price is $60, and the variable costs are $35 + $12 = $47. Therefore, the opportunity cost of transferring internally is $60 - $47 = $13.

Question 17

The Raisin Division of Trail Mix Foods, Incorporated had the following operating results last year:
$$\begin{array} { l r } 
\text { Sales } ( 150,000 \text { pounds of raisins) } & \$ 60,000 \
\text { Variable expenses } & 37,500 \
\text { Contribution margin } & 22,500 \
\text { Fixed expenses } & 12,000 \
\text { Profit } & \$ 10,500 \

\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:
A) $0.25 per pound.
B) $0.08 per pound.
C) $0.15 per pound.
D) $0.40 per pound.

Accepted Answer

The variable cost per pound is $37,500 / 150,000 = $0.25.  Any transfer price above this amount will increase the Raisin Division's profit.

Question 18

Division A makes a part that it sells to customers outside of the company. Data concerning this part appear below:
$$\begin{array} { l r r } 
\text { Selling price to outside customers } & \$  40 \
\text { Variable cost per unit } & \$  30 \
\text { Total fixed costs } & \$ 10,000 \
\text { Capacity in units } & 20,000
\end{array}$$
Division B of the same company would like to use the part manufactured by Division A in one of its products. Division B currently purchases a similar part made by an outside company for $38 per unit and would substitute the part made by Division A. Division B requires 5,000 units of the part each period. Division A has ample capacity to produce the units for Division B without any increase in fixed costs and without impacting sales to outside customers. If Division A sells to Division B, the variable cost per unit would be $1 lower than when selling to outside customers. What should be the lowest acceptable transfer price from the perspective of Division A?
A) $40.
B) $38.
C) $30.
D) $29.

Accepted Answer

The lowest acceptable transfer price from the perspective of Division A is the variable cost of $29 per unit. This is because Division A would incur no additional fixed costs and would not impact sales to outside customers by selling to Division B.

Question 19

Dockside Enterprises Incorporated 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 and outside large-hull ships. The repair division has an estimated variable cost of $37 per labor-hour, has a backlog of work for outside ships, and charges $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?
A) $33.00.
B) $37.00.
C) $45.00.
D) $70.00.

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 20

Division A makes a part that it sells to customers outside of the company. Data concerning this part appear below:
$$\begin{array} { l r r } 
\text { Selling price to outside customers } & \$ 75 \
\text { Variable cost per unit } & \$ 50 \
\text { Total fixed costs } & \$ 400,000 \
\text { Capacity in (units) } &  25,000
\end{array}$$
Division B of the same company would like to use the part manufactured by Division A in one of its products. Division B currently purchases a similar part made by an outside company for $70 per unit and would substitute the part made by Division A. Division B requires 5,000 units of the part each period. Division A can already sell all of the units it can produce on the outside market. What should be the lowest acceptable transfer price from the perspective of Division A?
A) $75.
B) $66.
C) $16.
D) $50.

Accepted Answer

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

Quiz 15: Transfer Pricing

Transfer prices are used for all of the following except:

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?

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?

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?

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?

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?

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

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

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?