Question 1

Section 482 of the U.S. Internal Revenue Code governing the taxation of multinational transfer pricing recognizes that transfer prices can be:
A)market based
B)negotiated
C)cost-plus based
D)Both A and C are correct.

Accepted Answer

Section 482 of the U.S. Internal Revenue Code allows for transfer prices to be determined based on market-based or cost-plus methods. Both options (A and C) are recognized under this section. Negotiated transfer prices are not explicitly mentioned, but they may be used as a basis for determining market-based prices. Therefore, choice D (Both A and C are correct) is the best choice.

Question 2

Opportunity costs represent the cash flows directly associated with the production and transfer of the products and services.

Accepted Answer

Opportunity costs represent the cost of the forgone alternative, which is not necessarily a cash flow associated with production and transfer of products and services. It represents the foregone benefits of the next best alternative forgone due to the choice of a particular option.

Question 3

The seller of Product A has no idle capacity and can sell all it can produce at $60 per unit. Outlay cost is $12. What is the opportunity cost, assuming the seller sells internally?
A)$12
B)$48
C)$60
D)$72

Accepted Answer

The opportunity cost is the profit foregone by not selling the product externally. Since the selling price is $60 and the outlay cost is $12, the opportunity cost is $60 - $12 = $48.

Question 4

Tax considerations should play no part in determining a transfer price between international divisions of a firm.

Accepted Answer

Tax considerations should be taken into account when determining a transfer price between international divisions of a firm, as different tax laws in different countries can significantly affect the overall profitability of the company. Ignoring tax considerations could result in the company paying too much or too little tax, which would ultimately impact the company's bottom line.

Question 5

A(n)________ is a binding agreement between a multinational and the United States Internal Revenue Service to obtain approval for a specific transfer price for a number of years.
A)Tax Treaty
B)Advanced Pricing Agreement
C)Revenue Ruling
D)Dual Price Ruling

Accepted Answer

An Advanced Pricing Agreement (APA) is a binding agreement between a multinational corporation and the U.S. Internal Revenue Service (IRS) to obtain approval for a specific transfer pricing methodology for a number of years. This agreement provides certainty and predictability on transfer pricing issues and reduces the risk of double taxation. A tax treaty is an agreement between two countries regarding taxation of income and assets, a revenue ruling is an official interpretation by the IRS on how the law should be applied to a specific set of circumstances, and a dual price ruling is not a recognized term in tax or transfer pricing.

Question 6

One of the problems in using one set of accounting records for tax reporting and another set of records for internal management reporting is:
A)it is illegal
B)tax authorities may suspect manipulation of records
C)it is almost impossible to keep the records straight and hard to reconcile the books
D)Both A and B are correct.

Accepted Answer

Using different sets of records can lead tax authorities to suspect manipulation, as it may appear that the company is trying to present different financial positions for different purposes.

Question 7

The Home Office Company makes all types of office desks. The Computer 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 computer desk sells for $400.
The Executive Division wants to buy 5,000 desks at $280 for its custom office design business. The Computer 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 Computer Desk Division? Why?
b. From the perspective of the Computer 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 The Home Office Company makes all types...

Question 8

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 $20 per pound for the next year. The Production Division recently increased its unit price to $40. The manager of the Production Division presented the following information variable cost $32 and fixed cost $8 t o top management in order to attempt to force the Assembly Division to purchase the stuffing internally. The Assembly Division purchases 20,000 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 $50 per pound and the Production Division is able to utilize the facilities for other operations, resulting in a monthly cash-operating savings of $30 per pound?
A)$1,000,000
B)$360,000
C)$(240,000)
D)$(400,000)

Accepted Answer

If the Assembly Division purchases the stuffing internally from the Production Division, the cost would be $40 per pound. However, if they purchase from the external supplier at $50 per pound, their cost would be $10 higher per pound.

Monthly cost of purchasing from Production Division = 20,000 pounds x $40 = $800,000
Monthly cost of purchasing from external supplier = 20,000 pounds x $50 = $1,000,000

However, the Production Division is offering a monthly cash-operating savings of $30 per pound if the Assembly Division purchases internally. This means that the actual cost of purchasing from the Production Division would be $10 lower than $40 per pound, or $30 per pound.

Monthly cost of purchasing from Production Division with cash-savings = 20,000 pounds x ($40 - $30) = $200,000

Therefore, the monthly operating advantage of purchasing internally would be:

$1,000,000 - $200,000 = $800,000

This means that purchasing from the external supplier would result in a monthly operating disadvantage of $800,000.

Question 9

Additional factors that arise in multinational transfer pricing include tariffs and customs duties levied on imports of products into a country.

Accepted Answer

Tariffs and customs duties can impact the transfer pricing decisions of multinational companies when they import products into another country. These additional costs can affect the overall profitability of the company and may influence how they set prices for their products.

Question 10

The Assembly 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 Assembly 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 Assembly Division of American Car Company...

Question 11

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 should cover both the incremental costs of producing the transferred goods or services and the opportunity cost of giving up the alternative use of those resources. Therefore, the best choice is D, which adds the incremental costs plus the opportunity costs.

Question 12

The seller of a product has no idle capacity and can sell all it can produce at $33 per unit. Outlay cost is $9. What is the opportunity cost, assuming the seller sells internally?
A)$6
B)$12
C)$24
D)$33

Accepted Answer

The opportunity cost is the profit foregone by not selling externally. The selling price is $33, and the outlay cost is $9, so the opportunity cost is $33 - $9 = $24.

Question 13

Which of the following transfer-pricing methods preserves sub-unit autonomy?
A)market-based transfer pricing
B)cost-based transfer pricing
C)negotiated transfer pricing
D)Both A and C are correct.

Accepted Answer

Negotiated transfer pricing preserves sub-unit autonomy because it allows the subunits to negotiate the price of the goods or services being transferred. This gives the subunits more control over their own operations and allows them to make decisions that are in the best interests of their own subunit.

Question 14

Market-based transfer prices are ideal when there is no idle capacity.in the selling division.

Accepted Answer

Market-based transfer prices are based on the market price of comparable goods or services sold by other companies in the market. This means that the transfer price reflects the current supply and demand conditions for the product or service. When there is no idle capacity in the selling division, market-based transfer prices are ideal because they ensure that the selling division receives a fair price for its product or service, while also ensuring that the buying division pays a reasonable price.

Question 15

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 16

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 17

Global Giant, a multinational corporation, has a producing subsidiary in a low tax rate country and a marketing subsidiary in a high tax country. If Global Giant wants to minimize its worldwide tax liability, we would expect Global Giant to:
A)stop producing in the low tax rate country
B)stop marketing in the high tax rate country
C)establish a low transfer price when the producing unit sells to the marketing unit
D)establish a high transfer price when the producing unit sells to the marketing unit

Accepted Answer

To minimize tax liability, Global Giant should establish a high transfer price when the producing unit sells to the marketing unit. This will result in lower profits in the high tax country and higher profits in the low tax country. As a transfer price is the price at which goods or services are transferred between different entities or divisions within a company, the high transfer price will reduce the profits of the marketing subsidiary in the high tax country, resulting in a lower tax liability in that country. Meanwhile, the low tax subsidiary in the producing country will enjoy higher profits, which will be taxed at a lower rate.

Question 18

The Micro Division of Silicon Computers produces computer chips that are sold to the Personal Computer Division and to outsiders. Operating data for the Micro Division for 20X5 are as follows:
  The Personal Computer Division has just received an offer from an outside supplier to furnish chips at $8.60 each. The manager of Micro Division is not willing to meet the $8.60 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 Micro Division's $9.00 unit cost figure.
b. Should the Micro Division meet the outside price of $8.60? Explain.
c. Could the $8.60 price be met and still show a profit for the Micro Division sales to the Personal Computer Division? Show computations.

Accepted Answer

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

Question 19

One major advantage of negotiated transfer pricing is that it can be done with little time or effort.

Accepted Answer

Negotiated transfer pricing involves discussions and agreements between different departments or entities within the same company. This process can take time and effort as both parties need to come to a mutually beneficial decision.

Question 20

If the product sold between divisions has no intermediate market, the opportunity cost of supplying the product internally is the variable cost of the product.

Accepted Answer

The answer of If the product sold between divisions has...

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

Section 482 of the U.S. Internal Revenue Code governing the taxation of multinational transfer pricing recognizes that transfer prices can be:

Opportunity costs represent the cash flows directly associated with the production and transfer of the products and services.

The seller of Product A has no idle capacity and can sell all it can produce at $60 per unit. Outlay cost is $12. What is the opportunity cost, assuming the seller sells internally?

Tax considerations should play no part in determining a transfer price between international divisions of a firm.

A(n) ________ is a binding agreement between a multinational and the United States Internal Revenue Service to obtain approval for a specific transfer price for a number of years.

One of the problems in using one set of accounting records for tax reporting and another set of records for internal management reporting is:

Additional factors that arise in multinational transfer pricing include tariffs and customs duties levied on imports of products into a country.

The minimum transfer price equals:

The seller of a product has no idle capacity and can sell all it can produce at $33 per unit. Outlay cost is $9. What is the opportunity cost, assuming the seller sells internally?

Which of the following transfer-pricing methods preserves sub-unit autonomy?

Market-based transfer prices are ideal when there is no idle capacity.in the selling division.

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

In analyzing transfer prices, the:

Global Giant, a multinational corporation, has a producing subsidiary in a low tax rate country and a marketing subsidiary in a high tax country. If Global Giant wants to minimize its worldwide tax liability, we would expect Global Giant to:

One major advantage of negotiated transfer pricing is that it can be done with little time or effort.

If the product sold between divisions has no intermediate market, the opportunity cost of supplying the product internally is the variable cost of the product.