Question 1

The transfer price used for internal transfers between divisions of the same company cannot affect the divisions' reported profits.

Accepted Answer

The transfer price used for internal transfers can have an impact on the divisions' reported profits. If a division sells a product to another division at a high transfer price, the selling division will report higher profits, while the buying division will have lower profits. This can give a misleading picture of the performance of each division. Therefore, it is important for companies to establish fair transfer pricing policies that reflect the true value of the goods or services exchanged between divisions.

Question 2

The selling division in a transfer pricing situation should want the transfer price to cover at least the full cost per unit plus the lost contribution margin per unit on outside sales.

Accepted Answer

False

Question 3

Nanke Products,Inc.,has a Sensor Division that manufactures and sells a number of products,including a standard sensor that could be used by another division in the company,the Safety Products Division,in one of its products.Data concerning that sensor appear below:
 The Safety Products Division is currently purchasing 3,000 of these sensors per year from an overseas supplier at a cost of $59 per sensor.
Assume that the Sensor Division is selling all of the sensors it can produce to outside customers.What should be the minimum acceptable transfer price for the sensors from the standpoint of the Sensor Division?
A) $37 per unit
B) $59 per unit
C) $20 per unit
D) $64 per unit

Accepted Answer

The total contribution margin on lost sales is computed as follows:
 11ea7761_168d_671f_81a5_71dc9b3794ca_TB2580_00 From the perspective of the selling division, profits would increase as a result of the transfer if and only if:
Transfer price > Variable cost per unit + (Total contribution margin on lost sales ÷ Number of units transferred)
Transfer price > $20 per unit + ($132,000 ÷ 3,000 units) = $20 per unit + $44 per unit = $64 per unit

Question 4

From the buying division's perspective,when a transferred item can be purchased from an outside supplier,the price charged by the outside supplier represents an upper bound on the charge that should be made on transfers between the selling and buying divisions.

Accepted Answer

This statement is true as the buying division should not be charged more than what it would cost to purchase the same item from an outside supplier, otherwise it would not make financial sense for the buying division to acquire from the selling division.

Question 5

Setting transfer prices at full cost can lead to bad decisions because,among other reasons,full cost does not take into account opportunity costs.

Accepted Answer

Full cost comprises of both variable and fixed costs, including direct and indirect costs. However, it does not consider opportunity costs, which is the cost of the profit that could have been earned in the best alternative use of the resources. Hence, setting transfer prices at full cost may not reflect the actual value of the products or services, which could lead to inefficient resource allocation and bad business decisions.

Question 6

Mittan Products,Inc.,has a Antennae Division that manufactures and sells a number of products,including a standard antennae that could be used by another division in the company,the Aircraft Products Division,in one of its products.Data concerning that antennae appear below:
 The Aircraft Products Division is currently purchasing 4,000 of these antennaes per year from an overseas supplier at a cost of $66 per antennae.
Assume that the Valve Division is selling all of the valves it can produce to outside customers.From the standpoint of the Valve Division,what is the lost contribution margin if the valves are transferred internally rather than sold to outside customers?
A) $48,000
B) $136,000
C) $2,312,000
D) $152,000

Accepted Answer

The total contribution margin on lost sales is computed as follows:
 11ea7761_168d_b541_81a5_e7f898d56293_TB2580_00

Question 7

Whenever the selling division must give up outside sales in order to sell internally,it has an opportunity cost that should be considered in setting the transfer price.

Accepted Answer

Opportunity cost is the cost of forgoing the next best alternative. When the selling division decides to sell internally instead of externally, it loses potential revenue from outside sales. This missed opportunity should be taken into consideration when setting the transfer price.

Question 8

Division Delta of Golvin Corporation makes and sells a single product which is used by manufacturers of fork lift trucks.Presently it sells 9,000 units per year to outside customers at $57 per unit.The annual capacity is 10,000 units and the variable cost to make each unit is $32.Division Echo of Golvin Corporation would like to buy 2,000 units a year from Division Delta to use in its products.There would be no cost savings from transferring the units within the company rather than selling them on the outside market.What should be the lowest acceptable transfer price from the perspective of Division Delta?
A) $57.00 per unit
B) $19.50 per unit
C) $34.50 per unit
D) $32.00 per unit

Accepted Answer

Available capacity for outside sales = Capacity - Internal sales
= 10,000 units - 2,000 units = 8,000 units
Lost outside sales = Total outside demand - Available capacity for outside sales
= 9,000 units - 8,000 units = 1,000 units
From the perspective of the selling division, profits would increase as a result of the transfer if and only if:
Transfer price > Variable cost per unit + Opportunity cost per unit
Transfer price > Variable cost per unit + (Total contribution margin on lost sales ÷ Number of units transferred)
Total contribution margin on lost sales = 1,000 units × ($57 per unit - $32 per unit) = $25,000
Transfer price > $32 per unit + ($25,000 ÷ 2,000 units) = $32 per unit + $12.50 per unit = $34.50 per unit

Question 9

If transfer prices are to be based on cost,then the costs should be actual costs rather than standard costs.

Accepted Answer

Using standard costs for transfer pricing can provide consistency and predictability, allowing for better planning and performance evaluation, whereas actual costs can vary and may introduce unpredictability.

Question 10

The Southern Division of Barstol Company makes and sells a single product,which is a part used in manufacturing trucks.The annual production capacity is 12,000 units and the variable cost of each unit is $35.Presently the Southern Division sells 11,000 units per year to outside customers at $49 per unit.The Northern Division of Barstol Company would like to buy 4,000 units a year from Southern to use in its production.There would be no savings in variable costs from transferring the units internally rather than selling them externally.The lowest acceptable transfer price from the standpoint of the Southern Division should be closest to:
A) $45.50 per unit
B) $35.00 per unit
C) $32.00 per unit
D) $49.00 per unit

Accepted Answer

Available capacity for outside sales = Capacity - Internal sales
= 12,000 units - 4,000 units = 8,000 units
Lost outside sales = Total outside demand - Available capacity for outside sales
= 11,000 units - 8,000 units = 3,000 units
From the perspective of the selling division, profits would increase as a result of the transfer if and only if:
Transfer price > Variable cost per unit + Opportunity cost per unit
Transfer price > Variable cost per unit + (Total contribution margin on lost sales ÷ Number of units transferred)
Total contribution margin on lost sales = 3,000 units × ($49 per unit - $35 per unit) = $42,000
Transfer price > $35 per unit + ($42,000 ÷ 4,000 units) = $35.00 per unit + $10.50 per unit = $45.50 per unit

Question 11

Division G makes a part that it sells to customers outside of the company.Data concerning this part appear below:
 Division H of the same company would like to use the part manufactured by Division G in one of its products.Division H currently purchases a similar part made by an outside company for $83 per unit and would substitute the part made by Division G.Division H requires 500 units of the part each period.Division G has ample capacity to produce the units for Division H without any increase in fixed costs and without cutting into sales to outside customers.If Division G sells to Division H rather than to outside customers,the variable cost be unit would be $2 lower.What should be the lowest acceptable transfer price from the perspective of Division G?
A) $47
B) $87
C) $83
D) $57

Accepted Answer

Because Division G has ample excess capacity and consequently there is no opportunity cost, the lowest price the part should be sold for is the variable cost that would be incurred or $47 per unit (= $49 per unit - $2 per unit).

Question 12

When a dispute arises over a transfer price,top managers should intervene to keep divisional managers from making a costly mistake,even though the divisions are evaluated as profit centers.

Accepted Answer

The answer of When a dispute arises over a transfer...

Question 13

Toldness Products,Inc.,has a Connector Division that manufactures and sells a number of products,including a standard connector that could be used by another division in the company,the Transmission Division,in one of its products.Data concerning that connector appear below:
 The Transmission Division is currently purchasing 11,000 of these connectors per year from an overseas supplier at a cost of $58 per connector.
What is the maximum price that the Transmission Division should be willing to pay for connectors transferred from the Connector Division?
A) $51 per unit
B) $58 per unit
C) $22 per unit
D) $29 per unit

Accepted Answer

From the perspective of the purchasing division, the transfer is financially attractive if and only if:
Transfer price < Cost of buying from outside supplier
Transfer price < $58 per unit

Question 14

Division E of Harveq Company has the capacity for making 6,000 motors per month and regularly sells 5,400 motors each month to outside customers at a contribution margin of $54 per motor.The variable cost per motor is $41.Division F of Harveq Company would like to obtain 900 motors each month from Division E.What should be the lowest acceptable transfer price from the perspective of Division E?
A) $59.00 per unit
B) $54.00 per unit
C) $41.00 per unit
D) $18.00 per unit

Accepted Answer

Available capacity for outside sales = Capacity - Internal sales
= 6,000 units - 900 units = 5,100 units
Lost outside sales = Total outside demand - Available capacity for outside sales
= 5,400 units - 5,100 units = 300 units
From the perspective of the selling division, profits would increase as a result of the transfer if and only if:
Transfer price > Variable cost per unit + Opportunity cost per unit
Transfer price > Variable cost per unit + (Total contribution margin on lost sales ÷ Number of units transferred)
Total contribution margin on lost sales = 300 units × $54.00 per unit = $16,200
Transfer price > $41 per unit + ($16,200 ÷ 900 units) = $41 per unit + $18 per unit = $59 per unit

Question 15

Using the formula in the text,if the lowest acceptable transfer price from the viewpoint of the selling division is $75 and the opportunity cost per unit on outside sales is $24,then the variable cost per unit must be:
A) $24 per unit
B) $99 per unit
C) $51 per unit
D) $75 per unit

Accepted Answer

From the perspective of the selling division, profits would increase as a result of the transfer if and only if:
Transfer price > Variable cost per unit + Opportunity cost per unit = $75 per unit
Variable cost per unit + $24 per unit = $75 per unit
Variable cost per unit = $75 per unit - $24 per unit = $51 per unit

Question 16

The Northern Division of Fiscar Corporation sells Part X2 to other companies for $87.20 per unit.According to the company's cost accounting system,the costs to Northern Division to make a unit of Part X2 are:
 The Southern Division of Fiscar Corporation uses a part much like Part X2 in one of its products.The Southern Division can buy this part from an outside supplier for $79.95 per unit.However,the Southern Division could use Part X2 instead of this part that it purchases from outside suppliers.What is the most that the Southern Division would be willing to pay the Northern Division for Part X2?
A) $87.20 per unit
B) $62.60 per unit
C) $58.10 per unit
D) $79.95 per unit

Accepted Answer

The Southern Division would be willing to pay at most $79.95 for the part because it can buy this part from an outside supplier for $79.95.

Question 17

Blitch Products,Inc.,has a Screen Division that manufactures and sells a number of products,including a standard screen that could be used by another division in the company,the Home Security Division,in one of its products.Data concerning that screen appear below:
 The Home Security Division is currently purchasing 2,000 of these screens per year from an overseas supplier at a cost of $50 per screen.
Assume that the Screen Division has enough idle capacity to handle all of the Home Security Division's needs.Does there exist a transfer price that would make both the Screen and Home Security Division financially better off than if the Home Security Division were to continue buying its screens from the outside supplier?
A) Yes, both divisions are always better off regardless of whether the selling division has enough idle capacity to handle all of the buying division's needs.
B) The answer cannot be determined from the information that has been provided.
C) Yes, the minimum transfer price that the selling division should be willing to accept is less than the maximum transfer price that the buying division would accept.
D) No, the selling division's price to outside customers is higher than the price that the buying division has to pay its outside supplier.

Accepted Answer

From the perspective of the selling division, profits would increase as a result of the transfer if and only if: Transfer price > Variable cost per unit + (Total contribution margin on lost sales ÷ Number of units transferred) Transfer price > $26 per unit + ($0 ÷ 2,000 units) = $26 per unit + $0 per unit = $26 per unit From the perspective of the purchasing division, the transfer is financially attractive if and only if: Transfer price < Cost of buying from outside supplier Transfer price < $50 per unit Both divisions would be financially better off making the transfer at any transfer price between $26 per unit and $50 per unit.

Question 18

Godina Products,Inc.,has a Receiver Division that manufactures and sells a number of products,including a standard receiver that could be used by another division in the company,the Industrial Products Division,in one of its products.Data concerning that receiver appear below:
 The Industrial Products Division is currently purchasing 10,000 of these receivers per year from an overseas supplier at a cost of $81 per receiver.
Assume that the Receiver Division is selling all of the receivers it can produce to outside customers.Does there exist a transfer price that would make both the Receiver and Industrial Products Division financially better off than if the Industrial Products Division were to continue buying its receivers from the outside supplier?
A) Yes, both divisions are always better off regardless of whether the selling division has enough idle capacity to handle all of the buying division's needs.
B) Yes, the minimum transfer price that the selling division should be willing to accept is less than the maximum transfer price that the buying division should be willing to accept.
C) The answer cannot be determined from the information that has been provided.
D) No, the minimum transfer price that the selling division should be willing to accept exceeds the maximum transfer price that the buying division should be willing to accept.

Accepted Answer

The total contribution margin on lost sales is computed as follows: 11ea7761_168b_6b48_81a5_298ff74f3641_TB2580_00 From the perspective of the selling division, profits would increase as a result of the transfer if and only if: Transfer price > Variable cost per unit + (Total contribution margin on lost sales ÷ Number of units transferred) Transfer price > $35 per unit + ($540,000 ÷ 10,000 units) = $35 per unit + $54 per unit = $89 per unit From the perspective of the purchasing division, the transfer is financially attractive if and only if: Transfer price < Cost of buying from outside supplier Transfer price < $81 per unit No transfer will be made between the two divisions because the minimum price that the selling division is willing to accept is greater than the maximum price that the buying division is willing to pay.

Question 19

Wengert Products,Inc.,has a Motor Division that manufactures and sells a number of products,including a standard motor.Data concerning that motor appear below:
 The Automotive Division of Wengert Products,Inc needs 8,000 special heavy-duty motors per year.The Motor Division's variable cost to manufacture and ship this special motor would be $20 per unit.Because these special motors would requires more manufacturing resources than the standard motor,the Motor Division would have to reduce its production and sales of standard motors to outside customers from 40,000 units per year to 27,200 units per year.
What is the total contribution margin on sales to outside customers that the Motor Division would give up if it were to make the special motors for the Automotive Division?
A) $336,000
B) $537,600
C) $860,160
D) $755,200

Accepted Answer

To produce the 8,000 special motors, the Motor Division will have to give up sales of 12,800 of the regular motors to outside customers.
 11ea7761_168b_1d26_81a5_afd012d4a5df_TB2580_00

Question 20

Lumpkins Products,Inc.,has a Valve Division that manufactures and sells a number of products,including a standard valve that could be used by another division in the company,the Pump Division,in one of its products.Data concerning that valve appear below:
 The Pump Division is currently purchasing 9,000 of these valves per year from an overseas supplier at a cost of $59 per valve.
Assume that the Valve Division is selling all of the valves it can produce to outside customers.Also assume that none of the variable expenses can be avoided on transfers within the company.What should be the minimum acceptable transfer price for the valves from the standpoint of the Valve Division?
A) $50 per unit
B) $62 per unit
C) $62 per unit.
D) $59 per unit

Accepted Answer

The total contribution margin on lost sales is computed as follows:
 11ea7761_168c_f1ec_81a5_051c92da147e_TB2580_00 From the perspective of the selling division, profits would increase as a result of the transfer if and only if:
Transfer price > Variable cost per unit + (Total contribution margin on lost sales ÷ Number of units transferred)
Transfer price > ($38 per unit − $0 per unit) + ($216,000 ÷ 9,000 units) = $38 per unit + $24 per unit = $62 per unit

Quiz 26: Transfer Pricing