Question 1

A common problem associated with transfer pricing occurs when

Accepted Answer

When managers do not agree with the transfer prices of the inputs provided to them or of the outputs of their own division, it can lead to conflicts and potential inefficiencies within the organization. It is important for management to establish clear and fair transfer pricing policies to avoid such issues. The other options presented in the question do not necessarily represent problems associated with transfer pricing, but rather examples of situations in which transfer pricing may be applied.

Question 2

Richardson, Inc., is in the process of developing a transfer price for the first section of what will eventually be an automatic lawn-cutting device. The housing is made in Department A and is used by Department B in the final assembly operation. Unit costs for the housing are as follows:
 $\begin{array}{|l|l|}
\hline \text { Cost Categories } & \text { Unit Cost } \
\hline \text { Direct materials } & \$ 8.10 \
\hline \text { Direct labor } & 7.00 \
\hline \text { Variable overhead } & 4.50 \
\hline \text { Fixed overhead } & 4.40 \
\hline \text { Profitmarkm }(30 \text { percent of cost }) & ?\
\hline
\end{array}$ Department B can purchase the housing from an outside supplier at $29.50 per unit.
a. Develop the cost-plus transfer price for the housing.
b. What should the transfer price be? Support your answer.

Accepted Answer

The answer of Richardson, Inc., is in the process of...

Question 3

Development of a transfer price involves

Accepted Answer

The development of a transfer price may involve applying a target profit rate to the unit cost of the semi-finished product. This is done to ensure that both the selling and buying divisions are incentivized appropriately and that the transfer price is fair for both parties. Options A and D are not accurate as they do not consider all relevant costs and rely heavily on external factors, respectively. Option B may be necessary but is not always required in the development of a transfer price.

Question 4

Division Alpha can purchase a required part from an outside supplier at $35. Division Beta will supply the part at a transfer price of $38.50. Division Alpha's manager should

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The answer of Division Alpha can purchase a required part...

Question 5

Jake Black has an opportunity to start an automobile pollution inspection business. After extensive studies, he has developed the following set of projected annual data on which to make his decision:
 $\begin{array}{|l|l|}
\hline \text { Direct service labor } & \$ 330,000 \
\hline \text { Variable service overhead costs } & 260,000 \
\hline \text { Fixed service overhead costs } & 250,000 \
\hline \text { Selling expenses } & 160,000 \
\hline \text { General and administrative expensess } & 200,000 \
\hline \text { Desired profit } & 102,000 \
\hline \text { Cost of assets employed } & 600,000 \
\hline
\end{array}$ Black believes that his company will inspect 100,000 automobiles per year. The company earns an average of 20 percent return on its assets.
a. Compute the projected cost for inspecting each automobile.
b. Determine the price to charge for inspecting each automobile using the gross margin pricing method.
c. Using the return on assets pricing method, compute the unit price to charge for this service.

Accepted Answer

The answer of Jake Black has an opportunity to start...

Question 6

Use of market transfer prices

Accepted Answer

Market transfer prices can lead to internal shortages of materials if the selling division prefers selling externally at higher prices, neglecting the needs of the buying division within the same company.

Question 7

Blackstone, Inc., features over a dozen models of tires in many different sizes. Two of the models of tires are Deluxe and Regular. Tire size LX14 is available in both models. The following information was obtained:
 $\begin{array}{|l|l|l|}
\hline & \text { Deluxe } & \text { Reguhr } \
\hline \text { Selling prices: }  & & \
\hline \text { Single tire, installed }& \$ 54 & \$ 49 \
\hline \text { Set of four tires, installed } & 199 & 185 \
\hline  \text { Cost per tire } & 30 & 23 \
\hline\
\hline
\end{array}$ The selling prices include installation costs. Each Deluxe tire costs $6 to mount and balance; each Regular tire costs $5 to mount and balance.
a. Compute the unit selling price for the tire only for both single tires and sets of four for each alternative.
b. Was cost the major consideration supporting these prices?
c. What other factors could have influenced these prices?

Accepted Answer

The answer of Blackstone, Inc., features over a dozen models...

Question 8

Transfer pricing

Accepted Answer

Transfer pricing involves determining the cost and profit if the output of one division is transferred to another division of the same company. It can be difficult to eliminate intercompany profits, which is why some companies may avoid using transfer pricing. However, it is a concept that is commonly used in decentralized companies as it allows for the determination of profits associated with each division. Option A is incorrect as transfer pricing does not rely on cost-based pricing methods, but rather focuses on the internal transfer of goods or services. Option B is incorrect as transfer pricing can actually make it more difficult to determine individual division profits due to the complexity of intercompany transactions.

Question 9

When a buying division elects to purchase from an outside supplier,

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The answer of When a buying division elects to purchase...

Question 10

Which of the following is not one of the three commonly used methods for determining transfer prices?

Accepted Answer

The three commonly used methods for determining transfer prices are negotiated, cost-plus, and market-based. Dictated is not one of the commonly used methods.

Question 11

Regal Kitchens, Inc., is considering the production of a new kitchen vent system. The Marketing Department has determined that there would be demand for the product at or below a selling price of $150 per unit. Anticipated unit costs are as follows:
 $\begin{array}{|l|l|}
\hline \text { Direct materials } & \$ 26.00 \
\hline \text { Direct labor costs } & \
\hline \text { Manufacturing } & \
\hline \text { Hours } & 2.2 \
\hline \text { Hourly rate } & \$ 12.00 \
\hline \text { Assembly } & \
\hline \text { Hours } & 2.5 \
\hline \text { Hourly rate } & \$ 10.00 \
\hline \text { Machine hours } & 2 \
\hline
\end{array}$ Regal uses the following activity-based costs:
 $\begin{array}{|l|l|}
\hline \text { Materials handling } & 120 \% \text { of direct material } \
\hline \text { Production } & \$ 7.00 \text { per machine hou } \
\hline \text { Shipping and handling } & \$ 10 \text { per unit } \
\hline
\end{array}$ The company's desired profit is 25 percent over total production and shipping costs.
Calculate the target cost for this product and determine whether or not it should be produced.

Accepted Answer

The answer of Regal Kitchens, Inc., is considering the production...

Question 12

Management of Mountain Berry Industries has just decided to employ a set of transfer prices for intracompany transfers between departments. The objective is to include return on assets as part of the performance evaluation of managers of the various cost centers. Data from the Molding Department for the past six months are as follows:
 $\begin{array}{|l|l|l|}
\hline 
& & \text { Expected Increases/ } \
{\text { Account }} & \text { Total Costs } &  \text { (Decrease) }\
\hline \text { Raw plastic-XYZ } & \$ 190,000 & 10 \% \
\hline \text { Raw plastic-ABC } & 305,000 & (4) \
\hline \text { Direct labor - melting } & 125,000 & 5 \
\hline \text { Direct labor -blencbing } & 138,000 & 5 \
\hline \text { Direct labor - shaping } & 151,000 & 5 \
\hline \text { Variable overhead } & 70,000 & 3 \
\hline \text { Fixed overhead } & 95,000 & (2) \
\hline
\end{array}$ During the six-month period, 100,000 units were produced. The same number of units are expected to be completed during the next six-month period. The company's markup percentage is 20 percent.
a. Compute the estimated total costs for the molding department for the next six months.
b. Develop the cost-plus transfer price for this plastic unit. Round answers to nearest two decimal places.

Accepted Answer

The answer of Management of Mountain Berry Industries has just...

Question 13

A negotiated transfer price

Accepted Answer

A negotiated transfer price is one that is agreed upon through bargaining between the managers of the buying and selling divisions. This allows the two parties to come to a mutually beneficial price, rather than using a set market price or legal procedures.

Question 14

Development of a transfer price involves

Accepted Answer

Development of a transfer price involves negotiation between the parties involved, in order to determine a fair price for the transfer of goods or services between different entities within the same company or group. Legal agreements may be necessary to formalize the transfer, but they are not an integral part of the development of the transfer price. Increases in insurance premiums or redistribution are not directly related to the development of a transfer price.

Question 15

The primary difference between a cost-based transfer price and a market-based transfer price is

Accepted Answer

The answer of The primary difference between a cost-based transfer...

Question 16

Seven years ago, Jared Singh formed the Singh Corporation and began producing computer equipment for home use. Because of the highly technical and competitive nature of the industry, Singh established a research and development division that is responsible for continuous evaluation and updating of critical electronic parts used in all of the corporation's products. The staff of the R&D Division has been very successful, contributing to the corporation's number one ranking in the industry in the United States.
Two years ago, the R&D Division took on the added responsibility of producing all microchip circuit boards for Singh computer equipment. One of its specialties is a graphics dissemination board (GDB). The GDB is a major factor in the quality of the Singh computers. Demand for the GDB has increased significantly in the last year, and the R&D Division has had to increase its production and assembly labor force. Three outside customers want to purchase the GDB for their computer products. To date, the R&D Division has been producing the GDBs only for internal use.
The controller of the R&D Division wants to create a transfer price for GDBs that will be used for all intracompany transfers. The following information has been projected for the next six months:
 $\begin{array}{lrr}
  \text { Costs: } &\
 \text { Direct materials } &\$771,800\
 \text { Direct labor } &796,200\
 \text { Overhead costs } &410,300\
 \text {  Costs allocated from corporate office} &988,700\
 \text {  } &\
\end{array}$

A profit factor of at least 20 percent must be added to the cost (including costs allocated from the corporate office) of the GDB for internal transfer purposes. The outside customers are willing to pay $45 for the GDB. Demand over the next six months is estimated at 78,000 GDBs for internal use and 22,000 for external customers.
a. Compute the cost of producing and distributing one GDB. Round answers to nearest two decimal places.
b. What should be the transfer price used by the R&D Division? What factors influenced your decision?

Accepted Answer

The answer of Seven years ago, Jared Singh formed the...

Question 17

Development of a transfer price involves

Accepted Answer

The development of a transfer price involves determining an appropriate profit markup for the transferring division. This ensures that the division selling the product or service can make a profit while also ensuring that the receiving division can purchase it at a fair price. The other options (A, C, and D) do not accurately reflect the process of developing a transfer price.

Question 18

Which of the following items should not be used to measure the performance of a manager whose division "sells" to other divisions of the company exclusively?

Accepted Answer

Corporate overhead allocations should not be used to measure the performance of a manager in a division that sells exclusively to other divisions of the company. This is because corporate overheads are costs that are not directly controlled by the division manager and are allocated based on corporate policies or formulas that may not reflect the division's actual use or benefit from these overheads. Therefore, using them to measure a manager's performance could be unfair and not reflective of the manager's actual performance in managing the division's operations.

Question 19

Market research shows potential customers will buy a particular product at a selling price of $3,100. If the desired profit is 28 percent of target cost, the company should make the product if the cost does not exceed

Accepted Answer

The answer of Market research shows potential customers will buy...

Question 20

Lethal Industries has recently patented a new product called MaxiDrive, an automobile oil for maximum engine performance. The following annual information was developed by the company's controller for use in price determination:
 $\begin{array}{|l|l|}
\hline \text { Variable production costs } & \$ 1,860,000 \
\hline \text { Fixed overhead } & 620,000 \
\hline \text { Selling expenses } & 420,000 \
\hline \text { General and administrative expenses } & 230,000 \
\hline \text { Desired profit } & 342,000 \
\hline
\end{array}$ Annual demand for the product is expected to be 500,000 quarts. Round answers to nearest two decimal places.
a. Compute the projected unit cost for one quart of MaxiDrive.
b. Prepare the formulas for computing the markup percentage and the selling price for one quart using the gross margin pricing method.

Accepted Answer

The answer of Lethal Industries has recently patented a new...

Quiz 11: Pricing Decisions, Incl Target Costing and Transfer Pricing

A common problem associated with transfer pricing occurs when

Development of a transfer price involves

Division Alpha can purchase a required part from an outside supplier at $35. Division Beta will supply the part at a transfer price of $38.50. Division Alpha's manager should

Use of market transfer prices

Transfer pricing

When a buying division elects to purchase from an outside supplier,

Which of the following is not one of the three commonly used methods for determining transfer prices?

A negotiated transfer price

Development of a transfer price involves

The primary difference between a cost-based transfer price and a market-based transfer price is

Development of a transfer price involves

Which of the following items should not be used to measure the performance of a manager whose division "sells" to other divisions of the company exclusively?

Market research shows potential customers will buy a particular product at a selling price of $3,100. If the desired profit is 28 percent of target cost, the company should make the product if the cost does not exceed