Question 1

For each of the following transfer price descriptions or operating situations, tell which of the general methods of transfer pricing it is most appropriate.
-Bargaining between selling and buying units

Accepted Answer

Negotiated transfer pricing involves bargaining between the selling and buying units to agree on a transfer price, which aligns with the description provided.

Question 2

For each of the following transfer price descriptions or operating situations, tell which of the general methods of transfer pricing it is most appropriate.
-Budgeted costs

Accepted Answer

Budgeted costs are related to the costs incurred in the production or acquisition of a product or service, making the cost-based method the most appropriate for setting transfer prices in this context.

Question 3

For each of the following transfer price descriptions or operating situations, tell which of the general methods of transfer pricing it is most appropriate.
-145% of full costs

Accepted Answer

The description "145% of full costs" directly relates to a cost-based transfer pricing method, as it involves setting the transfer price based on the costs incurred, plus a markup.

Question 4

For each of the following transfer price descriptions or operating situations, tell which of the general methods of transfer pricing it is most appropriate.
-Prices listed in a trade journal

Accepted Answer

Market-based transfer pricing uses external market prices as a benchmark for setting transfer prices. Prices listed in a trade journal reflect the current market rates, making it appropriate for this method.

Question 5

For each of the following transfer price descriptions or operating situations, tell which of the general methods of transfer pricing it is most appropriate.
-Selling price less normal sales commissions

Accepted Answer

Market-based transfer pricing uses the current market price as the basis for the transfer price. "Selling price less normal sales commissions" implies using the external market price (selling price) as a reference, adjusting it for costs not incurred in the internal transaction (sales commissions), which aligns with market-based transfer pricing principles.

Question 6

For each of the following transfer price descriptions or operating situations, tell which of the general methods of transfer pricing it is most appropriate.
-Variable manufacturing cost plus a mark-up

Accepted Answer

Variable manufacturing cost plus a mark-up falls under the cost-based method of transfer pricing, as it directly relates to the costs incurred in the production process with an added margin.

Question 7

A market is said to be perfectly-competitive when

Accepted Answer

A perfectly competitive market is characterized by a homogeneous product, equivalent buying and selling prices, and no individual buyer or seller being able to affect those prices by their own actions. This ensures that the market is efficient, with prices reflecting the true supply and demand.

Question 8

In a time of distress prices, which of the following is TRUE?

Accepted Answer

In a time of distress prices, setting the transfer price to the distress price in the short term, as long as it exceeds the incremental costs, can help the company manage its resources more effectively without sacrificing the vendor division's profitability or forcing it to cease operations. This approach allows the company to remain flexible and responsive to market conditions while ensuring that internal transactions are conducted in a manner that covers the costs incurred by the vendor division.

Question 9

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?

Accepted Answer

Under dual pricing, the buying division (Transportation) would be debited at the market price of $12.60, which is the cost they would incur if purchasing externally.

Question 10

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?

Accepted Answer

30,000 containers × $30 = $900,000

Question 11

Mar Company has two decentralized divisions, X and Y. Division X has been purchasing certain component parts from Division Y at $75 per unit. Because Division Y plans to raise the price to $100 per unit, Division X desires to purchase these parts from external suppliers for $75 per unit. The following information is available:

If Division X buys from an external supplier, the facilities Division Y uses to manufacture these parts will be idle. Assuming Division Y's fixed costs cannot be avoided, what is the result if Mar requires Division X to buy from Division Y at a transfer price of $100 per unit?

Accepted Answer

The answer of Mar Company has two decentralized divisions, X...

Question 12

A company has two divisions. The Bottle Division produces products that have variable costs of $3 per unit. For the current year, sales were 150,000 to outsiders at $5 per unit and 40,000 units to the Mixing Division at 140 percent of variable costs. Under a dual transfer pricing system, the Mixing Division pays only the variable cost per unit. The fixed costs of Bottle Division were $125,000 per year.
Mixing sells its finished products to outside customers for $11.50 per unit. Mixing has variable costs of $2.50 per unit in addition to the costs from Bottle. The annual fixed costs of Mixing were $85,000. There were no beginning or ending inventories during the year.
Required:
What are the operating incomes of the two divisions and the company as a whole for the year? Explain why the company operating income is less than the sum of the two divisions' total income.

Accepted Answer

The answer of A company has two divisions. The Bottle...

Question 13

The Home Office Company makes all types of office desks. The Computer Desk Division is currently producing 10,000 desks per year with a capacity of 15,000. The variable costs assigned to each desk are $300 and annual fixed costs of the division are $900,000. The computer desks sell for $400.
The Executive Division wants to buy 5,000 desks at $280 for its custom office design business. The Computer Desk manager refuses the order because the price is below variable cost. The Executive manager argues that the order should be accepted because it will lower the fixed cost per desk from $90 to $60 and will take the division to its capacity, thereby causing operations to be at their most efficient level.
Required:
a. Should the order from Executive Division be accepted by Computer Desk? Explain why or why not.
b. From the perspective of the Computer Desk Division and the company, should the order be accepted if the Executive Division plans on selling the chairs in the outside market for $420 after incurring additional costs of $100 per desk?
c. What action should the company president take?

Accepted Answer

The answer of The Home Office Company makes all types...

Question 14

Bradford Manufacturing Ltd. manufactures custom metal perforating and fabricating. Its Fabricating Division can transfer the perforated metal components to Bradford's Automotive Division or it can sell its products on the external market. Fabricating currently produces and sells 350,000 units per year to the external market at an average price of $38 per unit. Variable costs of production average $22.50 and fixed costs of $6.50/unit. Fabricating incurs $2.50 of variable selling costs on external sales. Fixed costs are based on the practical capacity of the plant which is 400,000 per year. The Automotive Division is interested in acquiring up to 50,000 units per year.
Required:
a. From the standpoint of Bradford Manufacturing Ltd., should the units be transferred? Determine the financial benefit or cost of your recommendation.
b. Using the general guidelines for transfer pricing, what is the minimum transfer price Fabricating should accept?
c. What is the range of acceptable transfer prices?
d. Now assume that demand in the external market for the components is expected to increase by 8%. The Automotive Division has negotiated with an external supplier to supply 50,000 units at a price of $34.50/unit. However, if the Automotive Division reduces its volume below the 50,000 unit volume, it must pay $39 per unit. What is the optimum sourcing arrangement for the company?

Accepted Answer

The answer of Bradford Manufacturing Ltd. manufactures custom metal perforating...

Question 15

Walton Industries has two divisions: Machining and Assembly. The Assembly Division is looking to source 20,000 units annually of specialized component product from Machining Division. The special components have variable costs of $260 per unit in variable production costs. The Machine Products Division has a bid from an outside supplier of $445 per unit. However, to meet the requirements of the Assembly Division, Machining would have to cut back production of an existing product. This product sells for $565 per unit, and requires $369 per unit in variable production costs. Packaging and shipping costs of the existing product are $12 per unit, but these would be slashed by 75% for the specialized component for Assembly. Machining currently sells 120,000 units of the existing product and this volume would have to be reduced by 25% to meet the Assembly Division's demand. 
Required:
Should the transfer take place, and if so, what would be the range of acceptable transfer prices?

Accepted Answer

The answer of Walton Industries has two divisions: Machining and...

Question 16

Payne Ltd. has two divisions. The Compound Division makes QZ54, an industrial compound, which is then transferred to the Processing Division. The Processing Division further processes the QZ54 and sells the final product to customers at $87/kg. Capacity in the Compound Division is 800,000 kg. QZ54 can be obtained on the external market at $50/kg Data regarding the costs per kilogram in each division are presented below:
  *In the Compound Division the variable overhead is 80% of the total, and in Processing variable overhead represents 65% of the total. Fixed overhead rates are based on capacity of 800,000 kg. in each division.
In addition to the manufacturing costs, the Compound Division would incur $2 per kilogram of selling costs which would be avoided on internal transfers. Similarly the Processing Division would avoid $3/kg. of ordering costs on internal purchases.
Required:
a. Calculate the operating incomes for each division assuming 800,000 kg. of QZ54 are transferred and the company uses a market transfer price.
b. Calculate the operating incomes for each division assuming 800,000 kg. of QZ54 are transferred and the company uses a transfer pricing policy based on 125% of absorption manufacturing cost.
c. Comment on your calculations in a and b in terms of the respective division managers preferences.
d. Should the company transfer its 800,000 kg. assuming the Compound Division can sell all of its output on the external market?

Accepted Answer

The answer of Payne Ltd. has two divisions. The Compound...

Question 17

The Micro Division of Silicon Computers produces computer chips that are sold to the Personal Computer Division and to outsiders. Operating data for the Micro Division are as follows:
?
  
The Personal Computer Division has just received an offer from an outside supplier to furnish chips at $8.60 each. The manager of Micro Division is not willing to meet the $8.60 price. She argues that it costs her $9.00 to produce and sell each chip. Sales to outside customers are at a maximum of 200,000 chips.
Required:
a. Verify the Micro Division's $9.00 unit cost figure.
b. Should the Micro Division meet the outside price of $8.60? Explain on a per unit basis.
c. Prepare a Micro Division income statement for the sale to the Personal Computer Division assuming that the unit selling price of $8.60 is agreed. Comment on the allocation of fixed costs.

Accepted Answer

The answer of The Micro Division of Silicon Computers produces...

Question 18

The Assembly Division of Canadian Car Company has offered to purchase 90,000 batteries from the Electrical Division for $104 per unit. At a normal volume of 250,000 batteries per year, production costs per battery are as follows:
 
The Electrical Division has been selling 250,000 batteries per year to outside buyers at $136 each. Capacity is 350,000 batteries per year. The Assembly Division has been buying batteries from outside sources for $130 each.
Required:
a. Should the Electrical Division manager accept the offer as is, make a counter offer, or reject the offer? Explain.
b. From the company's perspective, will the internal sales be of any benefit? Explain

Accepted Answer

The answer of The Assembly Division of Canadian Car Company...

Question 19

River Road Paint Company has two divisions. The Production Division produces base colours used by the Mixing Division. In 2015 the Production Division had external sales of 200,000 units at $8.00 per unit; and, transferred 60,000 units to the Mixing Division. The variable costs in the Production Division were $5 per unit and the fixed costs were $520,000 based on a practical capacity of 260,000 units. The Mixing Division sells its finished product to customers for $11.20 per unit. The Mixing Division had variable costs of $2.50 per unit and the annual fixed costs were $150,000. There were no beginning or ending inventories during the year.
Required:
Prepare the general journal entry for the transfer assuming that a dual pricing arrangement has been agreed to that requires the Mixing Department to pay the variable cost and the Production Department to receive the market price.

Accepted Answer

The answer of River Road Paint Company has two divisions....

Question 20

Sonora Manufacturing Inc. designs and builds off-road vehicles. The Frame Division builds frames that are used by the Assembly Division, and also sells frames externally to companies that produce vehicles such as golf carts. The Frame Division has an annual practical capacity of 5,000 units; a theoretical capacity of 7,300 units; and, a master-budget capacity of 4,000 units. The master-budget capacity is composed of 2,500 units produced for internal requirements, and the remainder sold externally for $800 per unit. The Frame Division has $150,000 of fixed costs. The variable costs for the units produced for internal purposes are $900 per unit, and for external sales $475. Sonora Manufacturing Inc. company policy is that internal transfers are to be done at full cost.
The Frame Division has been approached by a golf cart manufacturer who has offered to purchase 3,000 frames as a one-time special order for $650 per unit. This is an all or none order.
The Assembly Division can contract out the production of frames for $1,050 per unit.
Required:
a. Determine Frame Division's full cost per unit for the frames produced for internal use and the frames that a produced for external sales. Justify your choice of denominator activity level when calculating the fixed cost per unit.
b. Using the general guidelines for transfer pricing, what is the minimum transfer price the Frame Division should accept? Hint: There will be separate minimum transfer prices for the existing external customers and the one-time special order.
c. From a corporate point of view should the one-time special offer be accepted. Justify your answer on quantitative and qualitative considerations.

Accepted Answer

The answer of Sonora Manufacturing Inc. designs and builds off-road...

Quiz 21: Transfer Pricing and Multinational Management Control Systems

For each of the following transfer price descriptions or operating situations, tell which of the general methods of transfer pricing it is most appropriate. -Bargaining between selling and buying units

For each of the following transfer price descriptions or operating situations, tell which of the general methods of transfer pricing it is most appropriate. -Budgeted costs

For each of the following transfer price descriptions or operating situations, tell which of the general methods of transfer pricing it is most appropriate. -145% of full costs

For each of the following transfer price descriptions or operating situations, tell which of the general methods of transfer pricing it is most appropriate. -Prices listed in a trade journal

For each of the following transfer price descriptions or operating situations, tell which of the general methods of transfer pricing it is most appropriate. -Selling price less normal sales commissions

For each of the following transfer price descriptions or operating situations, tell which of the general methods of transfer pricing it is most appropriate. -Variable manufacturing cost plus a mark-up

A market is said to be perfectly-competitive when

In a time of distress prices, which of the following is TRUE?