Question 1

In a multinational setting,low transfer prices generally lead to low import duties.

Accepted Answer

When transfer prices (prices at which goods are traded between entities of a multinational corporation) are low, the value of goods imported is also low. This results in lower import duties as custom officials levy import duties based on the value of goods being imported. Therefore, low transfer prices generally lead to low import duties.

Question 2

The time and effort spent negotiating a transfer price between a company's divisions adds nothing directly to the profits of a company.

Accepted Answer

Negotiating a transfer price is a cost that does not directly contribute to generating profits. It is important for budgeting and internal accounting purposes, but it does not increase revenue or decrease expenses.

Question 3

The variable cost of Part X is $50 per unit and the full cost of the part is $80 per unit.The part is produced in Country Z and transferred to a plant in Country B.Country Z has a 30% income tax rate.Country B has a 50% income tax rate and an import duty equal to 10% of the price of the item.Part X can be transferred at full cost or variable cost.Assume Part X is transferred at full cost.By using full cost instead of variable cost for the transfer price,the net savings is ________.
A)$3 per unit
B)$6 per unit
C)$9 per unit
D)$15 per unit

Accepted Answer

If the part is transferred at variable cost, then the cost of the part in Country B would be $50/unit. Applying the income tax rate of 50% would result in an additional cost of $25/unit. Additionally, applying the 10% import duty on the variable transfer cost would result in an additional cost of $5/unit. Thus, the total cost of the part in Country B would be $80/unit, which is the same as the full cost transfer price.

Therefore, there is no savings from transferring at full cost instead of variable cost. The answer is $0 savings.

Question 4

For multinational companies,worldwide income taxes do not influence the setting of transfer prices.

Accepted Answer

Worldwide income taxes can have a significant impact on the setting of transfer prices for multinational companies. Companies may try to allocate profits to subsidiaries located in countries with lower tax rates in order to minimize their overall tax liability. Therefore, taking into account worldwide income taxes is a key factor in determining transfer prices for multinational companies.

Question 5

The joint formulation by a manager and his or her superior of a set of goals and plans for achieving the goals for a forthcoming period is known as ________.
A)capital budgeting
B)managerial effort
C)management control system
D)management by objectives

Accepted Answer

Management by objectives (MBO) is a management philosophy in which goals are set collaboratively between managers and employees, and progress toward those goals is periodically evaluated. MBO is a process for agreeing upon objectives within an organization so that management and employees agree to the objectives and understand what they are in the organization.

Question 6

The Nicholson and Cage Divisions are in the same company.Currently the Cage Division buys a part from the Nicholson Division for $82 per unit.The Nicholson Division wants to increase the price of the part to $100 per unit.Cage Division can buy the part for $94 from an outside supplier.The cost data for the part obtained from the Nicholson Division is below:
  If Nicholson does not provide the parts to Cage,it will save one-fourth of the fixed indirect production costs.The Nicholson Division has excess capacity but no alternative uses of the facilities.
Required: 
A)From the standpoint of the company as a whole,should Cage Division continue to buy the part from Nicholson Division?
B)From the standpoint of Cage Division only,should Cage Division continue to buy the part from Nicholson Division?

Accepted Answer

The answer of The Nicholson and Cage Divisions are in...

Question 7

Multinational companies use transfer pricing to minimize their worldwide income taxes,duties and tariffs.

Accepted Answer

Multinational companies often use transfer pricing to shift profits to subsidiaries in low-tax jurisdictions, allowing them to minimize their worldwide income taxes, duties, and tariffs. This practice has been criticized for resulting in lost tax revenue for governments and creating an uneven playing field for domestic firms.

Question 8

A division of Saskowski Company is located in Bulgaria.The country places restrictions on the amount of funds that may be paid as dividends to foreign owners.If Saskowski Company wants to maximize the amount of cash received from the foreign division,Saskowski Company should set a ________.
A)high transfer price for goods transferred out of Bulgaria
B)high transfer price for goods transferred into Bulgaria
C)low transfer price for goods transferred out of Bulgaria
D)low transfer price for goods transferred into Bulgaria

Accepted Answer

By setting a high transfer price for goods transferred into Bulgaria, the division in Bulgaria will have a lower taxable income, resulting in lower dividend restrictions on the amount of funds that can be paid to foreign owners. This allows Saskowski Company to maximize the amount of cash received from the foreign division.

Question 9

Dysfunctional decisions are decisions that conflict with organizational goals and objectives.

Accepted Answer

Dysfunctional decisions are those that work against the goals and objectives of an organization, therefore they do conflict with them.

Question 10

If actual costs are used for transfer pricing by a selling division,the division has little incentive to control costs.

Accepted Answer

If actual costs are used for transfer pricing, the selling division may not have a significant incentive to control costs since the cost of goods sold will be reimbursed by the buying division. Therefore, there is a risk of cost inefficiencies and inflated transfer prices. This situation can result in a lack of motivation for cost reductions and productivity improvements in the selling division.

Question 11

Top managers who wish to encourage decentralization will often make sure that both buying and selling division managers understand all the facts and then allow the managers to negotiate a transfer price.

Accepted Answer

Encouraging decentralization involves delegating decision-making power to lower-level managers, including buying and selling division managers. Allowing them to negotiate a transfer price means that they have the freedom to determine the value of goods or services traded between the two divisions, which helps to ensure that both sides benefit from the transaction. This approach can increase autonomy and motivation among divisional managers and enhance the efficiency and effectiveness of the organization as a whole.

Question 12

Sweater Division manufactures sweaters.The buttons used in production are purchased from an outside supplier at a cost of $4.50 per sweater.The buttons can also be purchased in house from Supply Division for $4.00 per sweater.The cost data for the buttons produced by Supply Division are as follows:
  Variable selling expenses are not incurred on inside transfers.Assume Supply Division has excess capacity.
Required: 
A)What is the minimum transfer price that Supply Division should charge Sweater Division for the transferred buttons?
B)What is the maximum transfer price that Sweater Division should pay Supply Division for the transferred buttons?

Accepted Answer

The answer of Sweater Division manufactures sweaters.The buttons used in...

Question 13

The variable cost of Part X is $50 per unit and the full cost of the part is $80 per unit.The part is produced in Country Z and transferred to a plant in Country B.Country Z has a 30% income tax rate.Country B has a 50% income tax rate and an import duty equal to 10% of the price of the item.Part X can be transferred at full cost or variable cost.Assume Part X is transferred at full cost.By using full cost instead of variable cost for the transfer price,the income tax effect per unit in Country B is ________.
A)a decrease in tax by $9 per unit
B)an increase in tax by $9 per unit
C)a decrease in tax by $15 per unit
D)an increase in tax by $15 per unit

Accepted Answer

The answer of The variable cost of Part X is...

Question 14

It is recommended that standard costs be used instead of actual costs for cost-based transfer prices.

Accepted Answer

Standard costs are used to eliminate the impact of fluctuations in actual costs due to factors such as variations in input prices, productivity, and efficiency levels. This provides a more stable basis for determining transfer prices and helps to avoid conflicts between different units within the same organization. Actual costs may be used in some cases where they provide a more accurate reflection of the costs involved, but standard costs are generally preferred.

Question 15

U.S.multinational companies must follow the Internal Revenue Code when setting transfer prices.

Accepted Answer

U.S. multinational companies must adhere to the Internal Revenue Code regulations regarding transfer pricing to ensure that they do not engage in profit shifting and tax evasion. This includes setting transfer prices at arms-length and providing documentation to support their chosen transfer pricing method.

Question 16

Multinational companies use transfer prices to minimize worldwide income taxes,________ and ________.
A)tariffs; financial restrictions imposed by U.S.government
B)tariffs; import duties
C)financial restrictions imposed by U.S.government; import duties
D)foreign bribes; import duties

Accepted Answer

Transfer pricing is a technique used by multinational companies to minimize worldwide income taxes by setting a price for goods or services that are transferred between related entities in different countries. By setting a high price for goods transferred from a subsidiary in a country with a high tax rate to a subsidiary in a country with a low tax rate, the parent company can reduce its overall tax liability. By setting a low price for goods transferred from a subsidiary in a country with a low tax rate to a subsidiary in a country with a high tax rate, the parent company can also reduce its overall tax liability. Tariffs and import duties are not directly related to transfer pricing, but they can affect the cost of importing goods across borders. Financial restrictions imposed by the U.S. government may limit the ability of multinational companies to use transfer pricing to reduce their tax liability, but these restrictions are not directly related to transfer pricing. Foreign bribes are illegal and unethical, and they have no relation to transfer pricing.

Question 17

A full-cost or full-cost plus profit transfer price can potentially create dysfunctional decisions.

Accepted Answer

Full-cost or full-cost plus profit transfer price may not accurately reflect the market value of a product, leading to suboptimal decisions by managers about production, pricing, and resource allocation. This can occur because the transfer price is based on the cost of producing the product instead of considering the external market conditions and demand.

Question 18

Companies will not suffer negative consequences if they overemphasize meeting a budget when evaluating managers.

Accepted Answer

If companies overemphasize meeting a budget, managers may take unethical or short-sighted actions, such as sacrificing long-term growth or cutting corners on quality, to meet their targets. This can ultimately harm the company's reputation and financial performance. Additionally, it can create a culture that prioritizes hitting numbers over innovation and creativity, which can stifle long-term success.

Question 19

The variable cost of Part X is $50 per unit and the full cost of the part is $80 per unit.The part is produced in Country Z and transferred to a plant in Country B.Country Z has a 30% income tax rate.Country B has a 50% income tax rate and an import duty equal to 10% of the price of the item.Part X can be transferred at full cost or variable cost.Assume Part X is transferred at full cost.By using full cost instead of variable cost for the transfer price,the income tax effect per unit in Country Z is ________.
A)a decrease in tax by $9 per unit
B)an increase in tax by $9 per unit
C)a decrease in tax by $24 per unit
D)an increase in tax by $24 per unit

Accepted Answer

When Part X is transferred at full cost ($80) instead of variable cost ($50), the reported income in Country Z increases by $30 per unit. With a 30% tax rate, this results in an increase in tax by $9 per unit ($30 * 0.30).

Question 20

A management by objectives approach stresses budgeted results.

Accepted Answer

Management by objectives (MBO) is an approach in which management and employees work together to define goals that are specific, measurable, achievable, relevant, and time-bound (SMART). The objectives are usually quantifiable and tied to a timeline, so budgeted results become an essential part of the process. Therefore, the statement is true.

Quiz 10: Management Control in Decentralized Organizations