Question 1

Use the following information to answer the following Questions
Genesis Scents has two divisions: the Cologne Division and the Bottle Division. The Bottle Division produces containers that can be used by the Cologne Division. The Bottle Division's variable manufacturing cost is $2, shipping cost is $0.10, and the external sales price is $3. No shipping costs are incurred on sales to the Cologne Division, and the Cologne Division can purchase similar containers in the external market for $2.60.
-The Bottle Division has sufficient capacity to meet all external market demands in addition to meeting the demands of the Cologne Division. Using the general rule, the transfer price from the Bottle Division to the Cologne Division would be:

Accepted Answer

The answer of Use the following information to answer the...

Question 2

Which of the following describes the goal that should be pursued when setting transfer prices?

Accepted Answer

The goal of setting transfer prices is to encourage decisions that align with the overall organization's best interests, promoting goal congruence among autonomous division managers. This ensures that individual divisions work together in a way that maximizes the entire organization's performance rather than focusing solely on their own profits.

Question 3

Racine Corporation has excess capacity. If the firm desires to implement the general transfer-pricing rule, opportunity cost would be equal to:

Accepted Answer

When a corporation has excess capacity, the opportunity cost of using that capacity to produce goods internally (rather than selling it externally) is zero, because the capacity would otherwise go unused.

Question 4

Overton Company uses cost-based transfer pricing. Its Food Processing Division has a standard variable cost of $8.50 per case and allocated fixed overhead of $2.25. The Processing Division, which has excess capacity, sells its output to external customers for $12.00 per case.
- If Overton uses variable costs as its base, the transfer price charged to its Retail Division should be:

Accepted Answer

Since Overton Company uses cost-based transfer pricing and the base is variable costs, the transfer price should start with the standard variable cost of $8.50 per case. Additional markup may be added based on company policy or negotiation, but the base is $8.50.

Question 5

To partially eliminate the problems that are associated with the short-term focus of return on investment, residual income, and EVA, the performance of a division's major investments is commonly evaluated through:

Accepted Answer

Postaudits are used to evaluate the performance of a division's major investments after they have been made, helping to address issues related to the short-term focus of financial metrics like ROI, residual income, and EVA by assessing actual versus expected results.

Question 6

Darrin's Auto Northern Division is currently purchasing a part from an outside supplier. The company's Southern Division, which has no excess capacity, makes and sells this part for external customers at a variable cost of $19 and a selling price of $31. If Southern begins sales to Northern, it (1) will use the general transfer-pricing rule and (2) will be able to reduce variable cost on internal transfers by $3. On the basis of this information, Southern would establish a transfer price of:

Accepted Answer

The answer of Darrin's Auto Northern Division is currently purchasing...

Question 7

Buzz's Florida Division is currently purchasing a part from an outside supplier. The company's Georgia Division, which has excess capacity, makes and sells this part for external customers at a variable cost of $22 and a selling price of $34. If Georgia begins sales to Florida, it (1) will use the general transfer-pricing rule and (2) will be able to reduce variable cost on internal transfers by $4. If sales to outsiders will not be affected, Georgia would establish a transfer price of:

Accepted Answer

The answer of Buzz's Florida Division is currently purchasing a...

Question 8

Use the following information to answer the following Questions
Genesis Scents has two divisions: the Cologne Division and the Bottle Division. The Bottle Division produces containers that can be used by the Cologne Division. The Bottle Division's variable manufacturing cost is $2, shipping cost is $0.10, and the external sales price is $3. No shipping costs are incurred on sales to the Cologne Division, and the Cologne Division can purchase similar containers in the external market for $2.60.
-Transfer prices can be based on:

Accepted Answer

Transfer prices can be based on variable cost, full cost, external market price, or a negotiated settlement between the buying and selling divisions. These are all common methods used to set transfer prices within companies.

Question 9

Standard costs rather than actual costs should be used in transfer-pricing methods because:

Accepted Answer

Standard costs help prevent inefficiencies from being passed on to buying divisions, as they reflect expected costs rather than actual, potentially inflated costs.

Question 10

Consider the following statements about transfer pricing:
I. Income taxes and import duties are an important consideration when setting a transfer price for companies that pursue international commerce.
II. Transfer prices cannot be used by organizations in the service industry.
III. Transfer prices are totally cost-based in nature, not market-based.
Which of the above statements is (are) true?

Accepted Answer

I is true because transfer pricing significantly affects the allocation of income among different tax jurisdictions, which in turn impacts income taxes and import duties. II is false because organizations in the service industry also use transfer pricing for internal transactions. III is false because transfer pricing can be based on market conditions, cost, or a combination of both, depending on the company's strategy and compliance requirements.

Question 11

The Altamonte Division of Custom Industries is in need of a particular service. The service can be obtained from another division of Custom at "cost," with cost defined as the summation of variable cost ($9) and fixed cost ($3). Alternatively, Altamonte can secure the service from a source external to Custom for $10. Which of the following statements is true?

Accepted Answer

The answer of The Altamonte Division of Custom Industries is...

Question 12

Macon Corporation has no excess capacity. If the firm desires to implement the general transfer-pricing rule, opportunity cost would be equal to:

Accepted Answer

The correct answer is D) the contribution margin forgone from the lost external sale. When a corporation like Macon has no excess capacity, the opportunity cost of internal transfers is the contribution margin that would have been earned on sales to external customers. This is because producing goods for internal use means the company cannot sell those goods externally, thus forgoing the potential contribution margin from those sales.

Question 13

The amounts charged for goods and services exchanged between two divisions are known as:

Accepted Answer

Transfer prices are the amounts charged for goods and services exchanged between divisions within the same company. This internal pricing mechanism allows for the valuation of transactions between different business units of the same organization.

Question 14

Grand's Auto Northern Division is currently purchasing a part from an outside supplier. The company's Southern Division, which has excess capacity, makes and sells this part for external customers at a variable cost of $19 and a selling price of $31. If Southern begins sales to Northern, it (1) will use the general transfer-pricing rule and (2) will be able to reduce variable cost on internal transfers by $3. On the basis of this information, Southern would establish a transfer price of:

Accepted Answer

The answer of Grand's Auto Northern Division is currently purchasing...

Question 15

Use the following information to answer the following Questions
Genesis Scents has two divisions: the Cologne Division and the Bottle Division. The Bottle Division produces containers that can be used by the Cologne Division. The Bottle Division's variable manufacturing cost is $2, shipping cost is $0.10, and the external sales price is $3. No shipping costs are incurred on sales to the Cologne Division, and the Cologne Division can purchase similar containers in the external market for $2.60.
-Assume the Bottle Division has no excess capacity and could sell everything it produced externally. Using the general rule, the transfer price from the Bottle Division to the Cologne Division would be:

Accepted Answer

The answer of Use the following information to answer the...

Question 16

Which of the following transfer-pricing methods can lead to dysfunctional decision-making behavior by managers?

Accepted Answer

Full cost transfer pricing can lead to dysfunctional decision-making because it may not reflect the true economic value or opportunity cost, potentially leading managers to make suboptimal decisions.

Question 17

The income calculation for a division manager's ROI should be based on:

Accepted Answer

The ROI for a division manager should be based on the profit margin controllable by the division manager, as it reflects the manager's ability to control costs and generate profits within their division.

Question 18

Use the following information to answer the following Questions
Genesis Scents has two divisions: the Cologne Division and the Bottle Division. The Bottle Division produces containers that can be used by the Cologne Division. The Bottle Division's variable manufacturing cost is $2, shipping cost is $0.10, and the external sales price is $3. No shipping costs are incurred on sales to the Cologne Division, and the Cologne Division can purchase similar containers in the external market for $2.60.
-The maximum amount the Cologne Division would be willing to pay for each bottle transferred would be:

Accepted Answer

The maximum amount the Cologne Division would be willing to pay for each bottle transferred is $2.60, which is the price at which it can purchase similar containers in the external market. This represents the highest price the Cologne Division would pay without incurring additional costs compared to external purchasing options.

Question 19

A general calculation method for transfer prices that achieves goal congruence begins with the additional outlay cost per unit incurred because goods are transformed and then

Accepted Answer

The correct method involves adding the opportunity cost per unit to the organization because of the transfer. This reflects the value of the next best alternative foregone as a result of the transfer, ensuring that the transfer price reflects both the additional costs incurred and the lost opportunity from not using the goods elsewhere.

Question 20

Clariton Corporation has two divisions, Kissimmee and Grant, and evaluates management on the basis of return on investment. Kissimmee currently makes a part that it sells to both Grant and outsiders. Selected data follow.

Kissimmee is seeking an increase in its selling price to $28 per unit because of rising costs. Grant can obtain comparable units from an outside supplier for $26; however, if Grant uses the supplier, Kissimmee will have idle capacity because of an inability to increase sales to outsiders. From the perspective of Clariton Corporation:

Accepted Answer

The answer of Clariton Corporation has two divisions, Kissimmee and...

Quiz 13: Investment Centers and Transfer Pricing