Question 1

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:
 $$\begin{array} { | l | r | } 
\hline \text { Direct materials } & \$ 40 \
\hline \text { Direct manufacturing labor } & 30 \
\hline \text { Variable factory overhead } & 12 \
\hline \text { Fixed factory overhead } & \underline { 40 } \
\hline \text { Total } & \$ 112 \
\hline
\end{array}$$ 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 2

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 3

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

This is because the dual pricing system involves using different prices in different jurisdictions, and this can lead to disagreements over which price should be used for tax calculations.

Question 4

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 variable cost, not specifically variable manufacturing cost.

Question 5

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 allows managers to set prices based on their costs rather than the actual market prices, which can insulate them from the realities of the marketplace. This can lead to a lack of competitive pricing and a disconnect between the costs and revenues of the supplying division.

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 should at least cover the incremental costs incurred by the selling division, otherwise, the division will incur losses. The buyer has an upper limit (ceiling) and the seller has a lower limit (floor) for the transfer price. However, the buyer may not always be willing to pay more than the ceiling transfer price, and may negotiate with the selling division to reduce the price. Thus, options A, C, and D are not true in all cases.

Question 7

Dual pricing is not widely used.Explain its disadvantages.

Accepted Answer

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

Question 8

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,________.
A)...

Question 9

In markets that are not perfectly competitive,companies can increase their capacity utilization only by decreasing their prices.

Accepted Answer

In markets that are not perfectly competitive, companies have some market power and can influence the price of their products. By decreasing their prices, they can increase demand for their products and thus increase their capacity utilization.

Question 10

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 $270 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 11

One of the problems in using one set of accounting records for tax reporting and another set of records for internal management reporting is that ________.
A) it is illegal as well as unethical to do so
B) the tax authorities may suspect manipulation of records
C) it is almost impossible to keep the records straight and hard to reconcile the books
D) the shareholders do not approve of such methods and the market prices will decline

Accepted Answer

The answer of One of the problems in using one...

Question 12

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 the variable cost incurred by the supplying division, which is incremental cost, as well as the opportunity cost of the supplying division which is the contribution to profit foregone by not selling the product in the external market. Therefore, the correct formula for calculating minimum transfer price is incremental cost plus opportunity cost.

Question 13

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

If the selling subunit is operating at capacity, it means that the unit cannot be sold externally as there is no additional capacity available to produce more units. Therefore, the opportunity cost of transferring a unit internally is the revenue that could have been earned by selling it externally, which is equal to the market price. However, since the unit is being transferred internally, the variable cost associated with producing the unit is still incurred. Therefore, the opportunity cost of transferring a unit internally rather than selling it externally is equal to the market price minus the variable cost.

Question 14

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 -to 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 from the external supplier at $50 per pound, then the monthly cost would be:

$50 * 20,000 = $1,000,000

If the Assembly Division purchases the stuffing internally from the Production Division, then the monthly cost would be:

($40 - $32) * 20,000 = $160,000

However, there is also a monthly cash-operating savings of $30 per pound that the Production Division is able to utilize for other operations. Therefore, the total monthly cost of purchasing internally would be:

($40 - $32 - $30) * 20,000 = $160,000 - $160,000 = $0

This means that purchasing internally would result in a monthly operating advantage of $1,000,000 - $0 = $1,000,000. However, since the question asks for the operating advantage (disadvantage), the answer would be negative or a disadvantage. Therefore, the monthly operating disadvantage would be:

-$1,000,000 or $(1,000,000)

Therefore, the best choice is C.

Question 15

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 16

The seller of Product A has no idle capacity and can sell all it can produce at $50 per unit.Outlay cost is $12.What is the opportunity cost,assuming the seller sells internally?
A) $12
B) $38
C) $50
D) $62

Accepted Answer

The opportunity cost is the profit forgone by not selling in the external market. Since the seller can sell all it can produce at $50 per unit in the external market, the opportunity cost is $50 - $12 = $38. Therefore, the best choice is B.

Question 17

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:
 $$\begin{array} { | l | r | r | } 
\hline & \text { Internal Sales } & \text { External Sales } \
\hline \text { Sales: } & & \
\hline 300,000 \text { chips at } \$ 10 & \$ 3,000,000 & \
\hline 200,000 \text { chips at } \$ 12 & & \$ 2,400,000 \
\hline \text { Variable expenses at } \$ 4 & 1,200,000 & \underline { 800,000 } \
\hline \text { Contribution margin } & \$ 1,800,000 & \$ 1,600,000 \
\hline \text { Fixed cost (allocated in units) } & 1,500,000 & 1,000,000 \
\hline \text { Operating income } & \$ 300,000 & \$ 600,000 \
\hline
\end{array}$$ 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 18

In the context of transfer pricing,which of the following represents the maximum contribution margin forgone by the selling subunit if the product or service is transferred internally?
A) sub-optimal transfer price
B) notional loss
C) compromise sale
D) opportunity cost

Accepted Answer

The concept of opportunity cost refers to the maximum contribution margin forgone by the selling subunit if the product or service is transferred internally. It represents the value of the next best alternative foregone in favor of the internal transfer. Therefore, opportunity cost is the best choice among the given options. A sub-optimal transfer price refers to a price that is not optimal for either the buying or selling subunit, leading to inefficiencies. Notional loss and compromise sale are not relevant to the context of transfer pricing.

Question 19

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 minimum transfer price should include only the incremental cost incurred up to the point of transfer and the opportunity cost incurred by the selling subunit. This will ensure that the selling subunit is compensated for its actual costs and also provides a fair opportunity cost for not being able to sell the product to an outside customer. The other options include sunk costs, historical costs, or fixed costs, which are not relevant to the transfer price decision.

Question 20

The seller of a product has no idle capacity and can sell all it can produce at $39 per unit.Outlay cost is $9.What is the opportunity cost,assuming the seller sells internally?
A) $9
B) $30
C) $39
D) $48

Accepted Answer

The opportunity cost is the value of the best alternative forgone. In this case, the best alternative forgone is the price at which the seller could sell the product in the external market. Since the seller can sell all it can produce at $39 per unit, the opportunity cost is $39 per unit. Therefore, the seller should sell externally, as it provides a higher opportunity cost ($39) than selling internally ($30).

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

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

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.

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.

In analyzing transfer prices,the ________.

Dual pricing is not widely used.Explain its disadvantages.

In markets that are not perfectly competitive,________.

In markets that are not perfectly competitive,companies can increase their capacity utilization only by decreasing their prices.

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

The minimum transfer price equals ________.

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.

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 seller of Product A has no idle capacity and can sell all it can produce at $50 per unit.Outlay cost is $12.What is the opportunity cost,assuming the seller sells internally?

In the context of transfer pricing,which of the following represents the maximum contribution margin forgone by the selling subunit if the product or service is transferred internally?

Which of the following denotes minimum transfer price?

The seller of a product has no idle capacity and can sell all it can produce at $39 per unit.Outlay cost is $9.What is the opportunity cost,assuming the seller sells internally?