Question 1

Mazuka,Inc.has a division that manufactures a component that sells for $165 and has a variable cost of $35.Another division of the company wants to purchase the component.Fixed cost per unit of the component is $22.What is the transfer price if the division is operating at full capacity?
A) $57
B) $187
C) $165
D) $22

Accepted Answer

When operating at full capacity, the transfer price should be the market price, which is $165, to reflect the opportunity cost of selling externally.

Question 2

Raven,Inc.has a division that manufactures a component that sells for $195 and has a variable cost of $30.Another division of the company wants to purchase the component.Fixed cost per unit of the component is $20.What is the minimum transfer price if the division is operating below its capacity?
A) $195
B) $30
C) $50
D) $20

Accepted Answer

The answer of Raven,Inc.has a division that manufactures a component...

Question 3

When a division is operating at capacity,the transfer price should be ________.
A) based on opportunity cost
B) a market-based transfer price
C) a cost-based transfer price
D) the total manufacturing cost

Accepted Answer

When a division is operating at capacity, the transfer price should be a market-based transfer price. This is because at capacity, the division has no additional capacity to produce goods for internal transfers. Therefore, any goods transferred will require the division to forgo potential revenue that could have been earned by selling those goods on the open market. As such, a market-based transfer price reflects the price that the goods could have been sold for on the open market and ensures that each division is treated fairly and receives proper compensation for its products or services.

Question 4

The primary objective in setting transfer prices is to ________.
A) establish a system that determines the best transfer prices for the company as a whole
B) evaluate the managers of the responsibility centers involved
C) achieve goal congruence by selecting a price that will maximize overall company profits
D) make it easy for managers to select prices that maximize division profits

Accepted Answer

The primary objective in setting transfer prices is to achieve goal congruence by selecting a price that will maximize overall company profits. This means that the transfer price should be set at a level that encourages both the selling division and the buying division to act in the best interests of the company as a whole. It is not about evaluating or rewarding individual managers, nor is it about maximizing division profits without regard for the overall impact on the company.

Question 5

The primary objective in setting transfer prices is to ________.
A) maximize profits for the company as a whole
B) maximize profits for the selling division
C) minimize the cost to the purchasing division
D) maximize profits for the purchasing division

Accepted Answer

The primary objective in setting transfer prices is to maximize profits for the company as a whole. This means that the transfer price should be set at a level that allows both the selling and purchasing divisions to maximize their profits, while also ensuring that the company as a whole is benefiting from the transaction. Setting transfer prices solely to maximize profits for one division can negatively impact the overall profitability of the company.

Question 6

List two objectives in setting transfer prices.

Accepted Answer

The answer of List two objectives in setting transfer prices....

Question 7

A cost-based transfer price considers the cost of producing the goods when determining the price.

Accepted Answer

A cost-based transfer price is based on the cost incurred in producing the goods. This approach considers the direct costs and indirect costs associated with the production of the goods and sets a price accordingly. This method is suitable for situations where the buyer and the seller are part of the same organization or where there is no competition in the market.

Question 8

Opportunity cost is the benefit ________.
A) received by selling goods on behalf of another division
B) received by selling goods to one of the other divisions within the company
C) given up by purchasing goods at a price lower than its total manufacturing cost
D) given up by choosing an alternate course of action

Accepted Answer

Opportunity cost is the benefit that is given up by choosing an alternate course of action. It refers to the value of the next best alternative that must be foregone in order to pursue a certain action. Therefore, the correct answer is D.

Question 9

When operating at capacity,a market-based transfer price should be used.

Accepted Answer

When operating at capacity, a market-based transfer price should be used. This is because when a company is operating at full capacity, the opportunity cost of using internal resources becomes higher than the cost of buying from an external market. Hence, a market-based transfer price ensures that the buying department pays a fair price for the goods or services it purchases from the selling department, which in turn recognizes the external market value of the goods or services produced.

Question 10

If a market-based transfer price is used,the transfer price is based on the cost of goods sold.

Accepted Answer

A market-based transfer price is based on the market value or price at which similar goods or services are sold. It is not necessarily based on the cost of goods sold.

Question 11

A market-based transfer price is based on the ________ when determining the transfer price.
A) variable costs
B) sales price of goods
C) cost of the goods
D) contribution margin

Accepted Answer

A market-based transfer price is based on the sales price of goods. This means the transfer price is determined by the price at which similar goods are sold in the market. This approach ensures that the transfer price is fair and reflects the market value of the goods. The other options, such as variable costs or cost of goods, may be used to determine the cost of producing the goods but are not relevant for setting transfer prices. Contribution margin can be useful in determining the profitability of a product but is also not directly related to transfer pricing.

Question 12

In many cases,the amount of the transfer price does not affect overall company profits.

Accepted Answer

The transfer price is the price at which goods or services are transferred between different divisions or entities of the same company. The transfer price does not affect the overall company profits since it is an internal transaction and does not involve any external sales or expenses. However, the transfer price can affect the performance evaluation and decision-making process of the different divisions or entities within the company.

Question 13

Sandpiper Inc.has a division that manufactures a component that sells for $150 and has a variable cost of $50.Another division of the company wants to purchase the component.Fixed cost per unit of the component is $20.What is the minimum transfer price if the division is operating at capacity?
A) $150
B) $50
C) $70
D) $20

Accepted Answer

The minimum transfer price when operating at capacity is the selling price of $150, as selling externally would not incur any additional costs and would utilize the full capacity profitably.

Question 14

Define market-based transfer price.When should market-based transfer pricing be used? Explain your answer.

Accepted Answer

The answer of Define market-based transfer price.When should market-based transfer...

Question 15

If a company allows division managers to negotiate a cost-based transfer price,it is better to use actual costs rather than standard costs.Otherwise,the selling division has no motivation to control costs.

Accepted Answer

Using standard costs for transfer pricing encourages cost control because it sets a benchmark for performance. If actual costs are used, the selling division might not be motivated to control costs, as any inefficiency could be passed on through higher transfer prices.

Question 16

Define cost-based transfer price.When should cost-based transfer pricing be used? Explain your answer.

Accepted Answer

The answer of Define cost-based transfer price.When should cost-based transfer...

Question 17

The transfer price should be an amount between the market price and the variable cost.

Accepted Answer

The transfer price should be set at a level that is fair to both the selling and receiving divisions. The market price is the price that the receiving division would have to pay if it purchased the goods or services from an outside supplier. The variable cost is the cost that the selling division incurs to produce the goods or services. The transfer price should be set somewhere between these two prices, so that both divisions can benefit from the transaction.

Quiz 24: Cost Allocation and Responsibility Accounting

Mazuka,Inc.has a division that manufactures a component that sells for $165 and has a variable cost of $35.Another division of the company wants to purchase the component.Fixed cost per unit of the component is $22.What is the transfer price if the division is operating at full capacity?

Raven,Inc.has a division that manufactures a component that sells for $195 and has a variable cost of $30.Another division of the company wants to purchase the component.Fixed cost per unit of the component is $20.What is the minimum transfer price if the division is operating below its capacity?

When a division is operating at capacity,the transfer price should be ________.

The primary objective in setting transfer prices is to ________.