Question 1

The transfer price should be chosen so that each division manager, when striving to maximize his or her own division's profits, makes the decision that maximizes the company's profit.

Accepted Answer

The transfer price should be set in a way that aligns the incentives of individual division managers with the overall profitability goals of the company, encouraging decisions that are beneficial for the company as a whole.

Question 2

A transfer price represents the amount charged when one division sells goods or services to another division of the same company.

Accepted Answer

Transfer pricing refers to the price that is charged by one division of a company for a product or service that it provides to another division of the same company, facilitating the valuation of internal transactions.

Question 3

In a decentralized organization, the managers of profit centers and investment centers have little autonomy in deciding whether to accept or reject orders and whether to buy from inside the organization or from outside.

Accepted Answer

In a decentralized organization, managers of profit centers and investment centers typically have significant autonomy, allowing them to make decisions such as accepting or rejecting orders and choosing whether to buy internally or externally.

Question 4

The transfer price charged when one division of an organization sells goods or services to another division affects the total profit of the overall organization, assuming a transfer is made.

Accepted Answer

The transfer price affects the distribution of profit between divisions within the organization but does not change the total profit of the organization as a whole, assuming no external market effects or tax implications are involved.

Question 5

The transfer pricing policy of a company can affect the incentives of autonomous division managers as they decide whether to make the transfer.

Accepted Answer

Transfer pricing policies influence the internal prices for transactions between divisions within a company, affecting division managers' decisions on whether to buy internally or externally, thus impacting their incentives related to cost, profit, and performance evaluation.

Question 6

The goal in setting transfer prices is to establish incentives for autonomous division managers to make decisions that support the goals of the division.

Accepted Answer

The goal in setting transfer prices is to establish incentives for autonomous division managers to make decisions that support the overall goals of the entire company, not just their individual divisions.

Question 7

Under imperfect competition, where the external market price depends on the production decisions of the producer, the opportunity cost incurred buy the company as a result of internal transfers depends on the quantity sold internally.

Accepted Answer

Under imperfect competition, internal transfers can affect the external market price, thus impacting the opportunity cost based on the quantity sold internally.

Question 8

A general rule that will ensure goal congruence is to set the transfer price equal to the sum of the additional outlay cost per unit incurred because goods are transferred and the opportunity cost per unit to the organization because of the transfer.

Accepted Answer

Setting the transfer price equal to the sum of the additional outlay cost plus the opportunity cost ensures that both the selling and buying divisions are no worse off due to the transfer. This aligns the incentives of both divisions with the overall goals of the organization, promoting goal congruence.

Question 9

When there is excess production capacity, there is no opportunity cost to the company and the transfer price under the general rule is only the outlay cost.

Accepted Answer

When there is excess capacity, the opportunity cost is zero because the company is not foregoing any other production. Therefore, the transfer price can be set at the outlay cost, which is the variable cost of producing the goods.

Question 10

Every unit transferred to another company division results in one less unit sold in the external market when there is no excess production capacity.

Accepted Answer

When there is no excess production capacity, every unit transferred internally to another division could have been sold externally, thus reducing the external sales by one unit for every unit transferred internally.

Question 11

Full-cost-based transfer prices lead the buying division to view costs that are non-unit-level costs for the company as a whole as unit-level costs to the buying division which can lead to faulty decision making.

Accepted Answer

Full-cost-based transfer prices include both variable and fixed costs, causing the buying division to treat all these costs as if they are variable with respect to its own operations. This can distort decision-making by not accurately reflecting the true incremental costs of internal transactions.

Question 12

Basing transfer prices on artificially low distress market prices could lead the producing division to sell or close the productive resources devoted to producing the product for transfer.

Accepted Answer

Using artificially low distress market prices for transfer pricing can make the producing division appear less profitable than it actually is, potentially leading to decisions to sell or close productive resources due to perceived underperformance.

Question 13

Transfer prices based upon variable costs are very useful for performance evaluations because such prices will always result in profit for the selling division.

Accepted Answer

Transfer prices based on variable costs do not guarantee a profit for the selling division because they do not cover the fixed costs that the division may incur.

Question 14

A common approach is to set the transfer price equal to the price in the external market and when there is no excess production capacity and perfect competition prevails, the general transfer pricing rule and the external price yield the same transfer price.

Accepted Answer

When there is no excess production capacity and perfect competition prevails, setting the transfer price equal to the external market price aligns with the general transfer pricing rule, as it ensures that the internal transactions are valued at a price that reflects the opportunity cost and market conditions, leading to efficient resource allocation within the company.

Question 15

Use of negotiation to arrive at a transfer price can lead to divisiveness and competition between participating division managers.

Accepted Answer

Negotiation for transfer prices can create divisiveness and competition among division managers as they may have conflicting interests; one aiming to minimize costs while the other seeks to maximize sales revenue.

Question 16

In situations when the producing division has excess capacity or the external market is imperfectly competitive, the general rule and the external market price will yield the same transfer price.

Accepted Answer

The general rule for setting a transfer price when the producing division has excess capacity is to set the transfer price at the marginal cost, whereas if the external market is imperfectly competitive, the external market price might not reflect the marginal cost, leading to different transfer prices under each scenario.

Question 17

Some US presidential candidates believe that the US could collect billions per year in additional taxes if transfer pricing was calculated according to US tax laws.

Accepted Answer

Many US presidential candidates and policymakers argue that by enforcing transfer pricing rules according to US tax laws, which aim to ensure that transactions between affiliated companies across borders are priced as if they were between unrelated parties, the US could prevent profit shifting to low-tax jurisdictions and collect billions in additional taxes annually.

Question 18

Because tax rates vary among countries, companies have incentives to set transfer prices that will increase revenues (and profits) in low-tax countries and increase costs (thereby reducing profits) in high-tax countries.

Accepted Answer

Companies use transfer pricing strategies to allocate profits within different parts of the same company located in various countries, aiming to increase profits in low-tax jurisdictions and decrease taxable income in high-tax ones, thereby reducing their overall tax burden.

Question 19

ABC Company has two divisions in different foreign countries, X and Y. If X imposes an import duty on goods transferred in from Y, the company has an incentive to set a relatively low transfer price on the transferred goods which will minimize the duty to be paid and maximize overall company profit.

Accepted Answer

By setting a low transfer price on goods transferred from division Y to division X, ABC Company can reduce the import duty imposed by country X, as duties are often calculated based on the declared value of goods. This strategy minimizes the total duty paid, thereby maximizing the overall profit of the company by reducing the cost of goods sold in the importing country.

Question 20

External segment reporting accepts the use of negotiated transfer prices.

Accepted Answer

The answer of External segment reporting accepts the use of...

Quiz 19: Transfer Pricing