Question 1

Minimum transfer price can be arrived at by adding incremental cost per unit incurred up to the point of transfer with the markup required.

Accepted Answer

Minimum transfer price can be arrived at by adding incremental cost per unit incurred up to the point of transfer with the opportunity cost per unit to the selling subunit.

Question 2

The minimum transfer price equals ________.
A) opportunity costs less the additional outlay costs
B) opportunity costs times 125% plus the additional outlay costs
C) opportunity costs divided by the additional outlay costs
D) incremental costs plus opportunity costs

Accepted Answer

The minimum transfer price is the minimum amount that the selling division will accept as transfer price, which should at least cover its incremental costs and opportunity costs. Therefore, the correct option is D - incremental costs plus opportunity costs. A is incorrect because it does not consider the additional outlay costs. B is incorrect because there is no standard markup percentage. C is incorrect because it does not consider the incremental costs incurred.

Question 3

Dual pricing uses two separate transfer-pricing methods to price each transfer from one subunit to another.

Accepted Answer

Dual pricing is a transfer pricing method that uses two separate transfer-pricing methods to price each transfer from one subunit to another. One transfer price is used to calculate the profit of the selling subunit, and the other transfer price is used to calculate the profit of the buying subunit. This helps to ensure that both subunits are fairly compensated for their contributions to the overall organization.

Question 4

The seller of Product A has no idle capacity and can sell all it can produce at $59 per unit. Outlay cost is $20. What is the opportunity cost, assuming the seller sells internally?
A) $20
B) $39
C) $59
D) $79

Accepted Answer

The total opportunity cost is $39 ($59 - $20).

Question 5

If the selling subunit is operating at capacity, the opportunity cost of transferring a unit internally rather than selling it externally is equal to the market price minus the variable cost.

Accepted Answer

When the selling subunit is operating at capacity, there is no room to produce more units and sell them externally. Therefore, transferring a unit internally rather than selling it externally has an opportunity cost equal to the market price minus the variable cost. The opportunity cost is the value of the forgone alternative, which in this case is the market price that could be earned by selling the unit externally. The variable cost is the cost of producing the unit, which is already incurred regardless of whether it is sold internally or externally. Therefore, the correct statement is that the opportunity cost of transferring a unit internally rather than selling it externally is equal to the market price minus the variable cost.

Question 6

In analyzing transfer prices, the ________.
A) buyer will not willingly purchase a product for less than the incremental costs incurred to manufacture the product internally
B) seller will not willingly sell a product for less than the incremental costs incurred to make the product
C) buyer will willingly pay more than the ceiling transfer price
D) buyer will not pay less than the ceiling transfer price

Accepted Answer

Transfer prices are the prices charged for goods and services sold between two different divisions or subsidiaries of the same company. In order to ensure that both the buyer and seller divisions are making a profit, the transfer price must be set at a level that is acceptable to both parties. However, the seller will not willingly sell a product for less than the incremental costs incurred to make the product, as this would result in a loss for the division. Option A is incorrect because often, the buyer may be willing to purchase a product for less than the incremental costs incurred to manufacture it internally, if the transfer price is still lower than what they could obtain externally. Options C and D are also incorrect as they imply that the buyer has no limit to what they are willing to pay, which is not necessarily true.

Question 7

Which of the following transfer-pricing methods always achieves goal congruence?
A) a market-based transfer price
B) a cost-based transfer price
C) a negotiated transfer price
D) full-cost plus a standard profit margin

Accepted Answer

Negotiated transfer prices can achieve goal congruence because they allow the involved divisions to agree on a price that reflects the internal efficiency and opportunity costs of both divisions, aligning their goals with the overall company objectives.

Question 8

The seller of a product has no idle capacity and can sell all it can produce at $40 per unit. Outlay cost is $19. What is the opportunity cost, assuming the seller sells internally?
A) $19
B) $21
C) $40
D) $59

Accepted Answer

The total opportunity cost is $21 ($40 - $19).

Question 9

The additional cost of producing and transferring the product or service is called variable manufacturing cost.

Accepted Answer

The additional cost of producing and transferring the product or service is called incremental cost. Incremental costs include any fixed cost component also.

Question 10

Dual pricing insulates managers from the realities of the marketplace because costs, not market prices, affect the revenues of the supplying division.

Accepted Answer

Dual pricing entails charging different prices to different internal and external customers. This approach can insulate managers from market realities because they may not be motivated to adjust prices according to demand and supply conditions in the marketplace. Instead, they may focus on recovering their costs and earning a return on their investments. This can result in inefficiencies and missed opportunities to capture value from market segments that are willing to pay more for the product or service.

Question 11

Dual pricing is not widely used. Explain its disadvantages.

Accepted Answer

The answer of Dual pricing is not widely used. Explain...

Question 12

The Microchip Division of Silicon Computers produces computer chips that are sold to the Personal Computer Division and to outsiders. Operating data for the Microchip Division for 20X5 are as follows:
  
The Personal Computer Division has just received an offer from an outside supplier to furnish chips at $8.90 each. The manager of Microchip Division is not willing to meet the $8.90 price. She argues that it costs her $9.00 to produce and sell each chip. Sales to outside customers are at a maximum of 200,000 chips.
Required:
a.Verify the Microchip Division's $9.00 unit cost figure.
b.Should the Microchip Division meet the outside price of $8.90? Explain.
c.Could the $8.60 price be met and still show a profit for the Microchip Division sales to the Personal Computer Division? Show computations.

Accepted Answer

The answer of The Microchip Division of Silicon Computers produces...

Question 13

In comparing the three basic approaches to transfer pricing, which of the following statements would be true?
A) A cost-based approach preserves subunit autonomy while negotiated transfer prices do not.
B) Market-based transfer pricing motivates managers but negotiated prices do not.
C) Cost-based transfer pricing systems are more difficult to implement and often make more time to implement than negotiated transfer pricing.
D) Market-based transfer pricing achieves goal congruence when markets are competitive while cost-based can achieve goal congruence, but not always.

Accepted Answer

Market-based transfer pricing achieves goal congruence when markets are competitive because it reflects the actual market conditions and prices. However, in non-competitive markets, negotiated prices may not reflect market prices, making it difficult to achieve goal congruence. On the other hand, cost-based transfer pricing can achieve goal congruence if the costs are properly allocated and reflect the actual use of resources. Implementing cost-based transfer pricing can be more time-consuming than negotiated pricing, but it preserves subunit autonomy as managers have control over their own costs. Therefore, statement D is the most accurate in describing the differences between the three approaches.

Question 14

The Fabrication Division of American Car Company has offered to purchase 90,000 batteries from the Electrical Division for $104 per unit. At a normal volume of 250,000 batteries per year, production costs per battery are as follows:
  
The Electrical Division has been selling 250,000 batteries per year to outside buyers at $136 each; capacity is 350,000 batteries per year. The Fabrication Division has been buying batteries from outside sources for $130 each.
Required:
a.Should the Electrical Division manager accept the offer? Explain.
b.From the company's perspective, will the internal sales be of any benefit? Explain.

Accepted Answer

The answer of The Fabrication Division of American Car Company...

Question 15

In markets that are not perfectly competitive, ________.
A) the selling division will not have any unused capacity
B) companies can increase their capacity utilization only by decreasing their prices
C) minimum transfer price will equal the incremental cost per unit incurred up to the point of transfer
D) the opportunity cost will equal the minimum contribution margin

Accepted Answer

The answer of In markets that are not perfectly competitive,...

Question 16

One concern with dual pricing is that it leads to disputes about which price should be used when computing the taxable income of subunits located in different tax jurisdictions.

Accepted Answer

Dual pricing can create confusion regarding which price should be used for tax purposes, leading to potential disputes between tax jurisdictions.

Question 17

TrueValue Company makes all types of office desks. The General Desk Division is currently producing 10,000 desks per year with a capacity of 15,000. The variable costs assigned to each desk are $300 and annual fixed costs of the division are $900,000. The General desk sells for $400.
The Executive Division wants to buy 5,000 desks at $250 for its custom office design business. The General Desk manager refused the order because the price is below variable cost. The executive manager argues that the order should be accepted because it will lower the fixed cost per desk from $90 to $60 and will take the division to its capacity, thereby causing operations to be at their most efficient level.
Required:
a.Should the order from the Executive Division be accepted by the General Desk Division? Why?
b.From the perspective of the General Desk Division and the company, should the order be accepted if the Executive Division plans on selling the desks in the outside market for $420 after incurring additional costs of $100 per desk?
c.What action should the company president take?

Accepted Answer

The answer of TrueValue Company makes all types of office...

Question 18

Soft Cushion Company is highly decentralized. Each division is empowered to make its own sales decisions. The Assembly Division can purchase stuffing, a key component, from the Production Division or from external suppliers. The Production Division has been the major supplier of stuffing in recent years. The Assembly Division has announced that two external suppliers will be used to purchase the stuffing at $40 per pound for the next year. The Production Division recently increased its unit price to $58. The manager of the Production Division presented the following information - variable cost $40 and fixed cost $8 -to top management in order to attempt to force the Assembly Division to purchase the stuffing internally. The Assembly Division purchases 20,600 pounds of stuffing per month.
What would be the monthly operating advantage (disadvantage) of purchasing the goods internally, assuming the external supplier increased its price to $82 per pound and the Production Division is able to utilize the facilities for other operations, resulting in a monthly cash-operating savings of $34 per pound?
A) $1,689,200
B) $865,200
C) $(164,800)
D) $(206,000)

Accepted Answer

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Question 19

Both the market-based transfer pricing approach and cost-based methods are useful for evaluating subunit performance.

Accepted Answer

The answer of Both the market-based transfer pricing approach and...

Question 20

Which of the following denotes minimum transfer price?
A) Minimum transfer price = Incremental cost per unit incurred up to the point of transfer + Opportunity cost per unit to the selling subunit
B) Minimum transfer price = Total cost per unit incurred up to the point of transfer + Sunk cost per unit to the selling subunit
C) Minimum transfer price = Current cost per unit incurred up to the point of transfer + Historical cost per unit to the selling subunit
D) Minimum transfer price = Variable cost per unit incurred up to the point of transfer + Fixed cost per unit to the selling subunit

Accepted Answer

The answer of Which of the following denotes minimum transfer...

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

Minimum transfer price can be arrived at by adding incremental cost per unit incurred up to the point of transfer with the markup required.

The minimum transfer price equals ________.

Dual pricing uses two separate transfer-pricing methods to price each transfer from one subunit to another.

The seller of Product A has no idle capacity and can sell all it can produce at $59 per unit. Outlay cost is $20. What is the opportunity cost, assuming the seller sells internally?

If the selling subunit is operating at capacity, the opportunity cost of transferring a unit internally rather than selling it externally is equal to the market price minus the variable cost.

In analyzing transfer prices, the ________.

Which of the following transfer-pricing methods always achieves goal congruence?

The seller of a product has no idle capacity and can sell all it can produce at $40 per unit. Outlay cost is $19. What is the opportunity cost, assuming the seller sells internally?

The additional cost of producing and transferring the product or service is called variable manufacturing cost.

Dual pricing insulates managers from the realities of the marketplace because costs, not market prices, affect the revenues of the supplying division.

Dual pricing is not widely used. Explain its disadvantages.

In comparing the three basic approaches to transfer pricing, which of the following statements would be true?

In markets that are not perfectly competitive, ________.

One concern with dual pricing is that it leads to disputes about which price should be used when computing the taxable income of subunits located in different tax jurisdictions.

Both the market-based transfer pricing approach and cost-based methods are useful for evaluating subunit performance.

Which of the following denotes minimum transfer price?