Question 1

A company should use cost-based transfer prices ________.
A) when a company's product is specialized
B) the market for the intermediate product is perfectly competitive
C) the interdependencies of subunits are minimal
D) there is no benefit from market-based transfer price

Accepted Answer

The answer of A company should use cost-based transfer prices...

Question 2

Nig Car Company manufactures automobiles. The Fastback Car Division sells its cars for $50,000 each to the general public. The fastback cars have manufacturing costs of $30,000 each for variable and $15,000 each for fixed costs. The division's total fixed manufacturing costs are $75,000,000 at the normal volume of 5,000 units.
The Coupe Car Division has been unable to meet the demand for its cars this year. It has offered to buy 1,000 cars from the Fastback Car Division at the full cost of $40,000. The Fastback Car Division has excess capacity and the 1,000 units can be produced without interfering with the current outside sales of 5,000. The 6,000 volume is within the division's relevant operating range.
Explain whether the Fastback Car Division should accept the offer.

Accepted Answer

The answer of Nig Car Company manufactures automobiles. The Fastback...

Question 3

Crush Company makes internal transfers at 155% of full cost. The Soda Refining Division purchases 41,000 containers of carbonated water per day, on average, from a local supplier, who delivers the water for $58 per container via an external shipper. To reduce costs, the company located an independent supplier in Illinois who is willing to sell 41,000 containers at $38 each, delivered to Crush Company's Shipping Division in Missouri. The company's Shipping Division in Missouri has excess capacity and can ship the 41,000 containers at a variable cost of $12.50 per container. What is the total cost of purchasing the water from the Illinois supplier and shipping it to the Soda Division?
A) $1,558,000
B) $2,070,500
C) $2,378,000
D) $512,500

Accepted Answer

Total cost to the company = 41,000 containers × ($12.50 + $38) = $2,070,500

Question 4

An advantage of a negotiated transfer price of a product to be transferred between divisions is the ________.
A) close relationship between the negotiated price and the market price
B) negotiated transfer price preserves divisional autonomy
C) negotiations usually do not require much time and energy
D) simplicity of its computations and close approximation to market price

Accepted Answer

Negotiated transfer prices preserve divisional autonomy by allowing divisions to negotiate the terms of the transfer, including the price, which respects their independence and decision-making authority within the organization. This autonomy can encourage a sense of ownership and responsibility among divisions, potentially leading to more efficient and effective operations.

Question 5

Super Shoes Company manufactures sneakers. The Athletic Division sells its socks for $18 a pair to outsiders. Sneakers have manufacturing costs of $6.00 each for variable and $6.00 for fixed. The division's total fixed manufacturing costs are $315,000 at the normal volume of 70,000 units.
The European Division has offered to buy 15,000 Sneakers at the full cost of $12. The Athletic Division has excess capacity and the 15,000 units can be produced without interfering with the current outside sales of 70,000. The 85,000 volume is within the division's relevant operating range.
Explain whether the Athletic Division should accept the offer.

Accepted Answer

The answer of Super Shoes Company manufactures sneakers. The Athletic...

Question 6

The full cost plus a markup transfer-pricing method can sometimes lead to goal incongruence.

Accepted Answer

The full cost plus a markup transfer-pricing method can sometimes lead to goal incongruence because it encourages the selling division to inflate costs in order to receive a higher transfer price, while the buying division may try to negotiate a lower transfer price to reduce costs. This can lead to conflicts between the two divisions and may not align with the overall goals of the company.

Question 7

When using transfer prices based on costs rather than market prices, management can better determine profitability of the investment made in the intermediate producing division.

Accepted Answer

A market based price is a better approach for determining the profitability of a product providing division 's investment.

Question 8

A transfer price based on the full cost plus a markup may lead to suboptimal decisions because ________.
A) it leads the buying division to regard the fixed costs and the markup of the selling division as a variable cost
B) it leads the buying division to regard the variable costs and the markup of the selling division as a fixed cost
C) it leads the buying division to regard the fixed costs and the markup of the selling division as total costs
D) it leads the buying division to regard the variable costs and the markup of the selling division as total costs

Accepted Answer

A transfer price based on full cost plus a markup can cause the buying division to incorrectly treat the fixed costs and markup from the selling division as variable costs, potentially leading to decisions that do not maximize the overall company's profitability.

Question 9

One advantage of prorating the difference between a maximum and minimum transfer price of a product to be moved between divisions is that it saves the cost of objective audits of transfer pricing.

Accepted Answer

Just the opposite is true. Proration methods require a high degree of trust and an exchange of information among divisions or objective audits of cost information to have long-run success.

Question 10

Which of the following is true about transfer pricing?
A) The maximum price that the buying division is willing to pay is the higher of the eventual contribution generated from an internal transaction and the price of purchasing from an external party
B) The selling division must always set a transfer price above the market price of the product to make the transaction economically feasible for the buying division.
C) There is generally a minimum transfer price the selling division will not go below based on its own cost structure.
D) The transfer-price range lies between the its fixed cost per unit and the higher of its contribution or price at which the product is available from external suppliers

Accepted Answer

There is generally a minimum transfer price the selling division will not go below based on its own cost structure. The other options are not entirely accurate. Option A is partially correct, but the maximum price that the buying division is willing to pay can also be influenced by external market prices. Option B is incorrect as the selling division may set a transfer price below the market price to maintain or increase market share. Option D is incorrect as the transfer price can also be above the fixed cost per unit, depending on the company's pricing strategy.

Question 11

Which of the following is a disadvantage of using negotiated transfer price?
A) It requires each division manager to put forth effort to increase division operating income.
B) Negotiated transfer prices take away the divisional autonomy as prices depend on bargaining strength.
C) Negotiations usually require much time and energy thereby consuming precious managerial time.
D) It may lead to divisional enmity because negotiation process may cause frictions among departments.

Accepted Answer

Negotiated transfer prices can consume significant managerial time and energy, as they require negotiations between divisions, which can be time-consuming and complex.

Question 12

The transfer-pricing method that reduces the goal-congruence problems associated with a pure cost-plus-based transfer-pricing method is the ________.
A) dual pricing
B) market pricing
C) single pricing
D) distress pricing

Accepted Answer

The answer of The transfer-pricing method that reduces the goal-congruence...

Question 13

A major advantage of using actual costs for transfer prices is that often inefficiencies are NOT passed along to the receiving division.

Accepted Answer

When actual costs are used inefficiencies are passed along to the receiving division.

Question 14

The range over which two divisions will negotiate a transfer price is ________.
A) between the supplying division's variable cost and the market price of the product
B) between the supplying division's variable cost and its full cost of the product
C) it could be anywhere above the supplying division's full cost of the product
D) between the supplying division's full cost and 180% above its full cost

Accepted Answer

The range over which two divisions will negotiate a transfer price is typically between the supplying division's variable cost and the market price of the product. This is because the supplying division needs to cover its variable costs, and the receiving division wants to pay as little as possible while still being able to make a profit on the product. Option B is incorrect because the full cost of the product is not relevant to the negotiation – only the variable cost is. Option C is too broad and does not reflect the typical negotiation range. Option D is too specific and does not reflect the wide range of potential negotiation outcomes.

Question 15

An advantage of using budgeted costs for transfer pricing among divisions is that ________.
A) overall corporate profitability is usually higher
B) it usually provides a basis for optimal decision making
C) the divisions know the transfer price in advance
D) it promotes subunit autonomy

Accepted Answer

Budgeted costs provide a predetermined transfer price, which allows the divisions to plan and budget accordingly. This can reduce uncertainty and promote cooperation between the divisions. However, it may not necessarily result in optimal decision making or overall corporate profitability. It also does not necessarily promote subunit autonomy, as the transfer price may still be controlled by higher-level management.

Question 16

Cost-based transfer prices are helpful when markets are not perfectly competitive.

Accepted Answer

Cost-based transfer prices are used when there is a lack of competitive market forces, where market prices may not be readily available or may be unreliable. In this scenario, transfer prices based on the cost of production or acquisition of goods can help to allocate resources efficiently and fairly within a company.

Question 17

When cost-based transfer pricing is used between subunits of a large organization, describe how to avoid making suboptimal decisions.

Accepted Answer

The answer of When cost-based transfer pricing is used between...

Question 18

Cost-based transfer prices are often used when markets for the product are not competitive or when the quality of the internal product is different from the externally available products.

Accepted Answer

Cost-based transfer prices are used in situations where market competition is limited, making it difficult to determine a fair price for a product. Additionally, when there are quality differences between the internal product and externally available products, using cost-based transfer prices can ensure that the internal product is priced appropriately based on its cost structure.

Question 19

Which of the following is a disadvantage of dual pricing?
A) It strongly preserves the autonomy of divisions, and the division managers are motivated to put forth effort to increase the operating income of their respective divisions, causing inefficiencies.
B) The price arrived by using dual pricing has no specific relationship to either costs or the market price.
C) It insulates managers from the realities of the marketplace because costs, not market prices, affect the revenues of the supplying division.
D) It assumes that the minimum transfer price equals the incremental cost per unit incurred up to the point of transfer minus the opportunity cost per unit to the selling division.

Accepted Answer

The answer of Which of the following is a disadvantage...

Question 20

Cornerstone Company has two divisions. The Bottle Division produces products that have variable costs of $3 per unit. Its 20X5 sales were 140,000 to outsiders at $5 per unit and 40,000 units to the Mixing Division at 140% of variable costs. Under a dual transfer-pricing system, the Mixing Division pays only the variable cost per unit. The fixed costs of the Bottle Division are $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 the Bottle Division. 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's operating income is less than the sum of the two divisions' total income.

Accepted Answer

The answer of Cornerstone Company has two divisions. The Bottle...

Quiz 22: Management Control Systems, Transfer Pricing, and Multinational Considerations

A company should use cost-based transfer prices ________.

An advantage of a negotiated transfer price of a product to be transferred between divisions is the ________.

The full cost plus a markup transfer-pricing method can sometimes lead to goal incongruence.

When using transfer prices based on costs rather than market prices, management can better determine profitability of the investment made in the intermediate producing division.

A transfer price based on the full cost plus a markup may lead to suboptimal decisions because ________.

One advantage of prorating the difference between a maximum and minimum transfer price of a product to be moved between divisions is that it saves the cost of objective audits of transfer pricing.

Which of the following is true about transfer pricing?

Which of the following is a disadvantage of using negotiated transfer price?

The transfer-pricing method that reduces the goal-congruence problems associated with a pure cost-plus-based transfer-pricing method is the ________.

A major advantage of using actual costs for transfer prices is that often inefficiencies are NOT passed along to the receiving division.

The range over which two divisions will negotiate a transfer price is ________.

An advantage of using budgeted costs for transfer pricing among divisions is that ________.

Cost-based transfer prices are helpful when markets are not perfectly competitive.

When cost-based transfer pricing is used between subunits of a large organization, describe how to avoid making suboptimal decisions.

Cost-based transfer prices are often used when markets for the product are not competitive or when the quality of the internal product is different from the externally available products.

Which of the following is a disadvantage of dual pricing?