Question 1

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 aligns the interests of the subunit with the overall goals of the company. However, when markets are not competitive, market-based transfer pricing may not reflect the true value of the goods or services being transferred. Cost-based transfer pricing can achieve goal congruence, but not always, as it may not encourage subunits to reduce costs and improve efficiency. Negotiated transfer pricing may not preserve subunit autonomy, as prices are negotiated between different subunits, but can motivate managers to work together to achieve the best outcome for the company. Cost-based transfer pricing systems can be less complex and easier to implement than negotiated transfer pricing, as they are based on objective data rather than subjective negotiations.

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

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 4

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 it cannot produce any more to meet the demands internally. Therefore, if a unit is transferred internally, it is considered a loss of potential revenue from selling it externally. The opportunity cost is equal to the market price that could have been earned by selling it externally minus the variable cost of production.

Question 5

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 6

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 7

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 8

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 9

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 cause issues when determining the taxable income of subunits in different tax jurisdictions because there may be disputes about which price should be used for tax purposes.

Question 10

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

Accepted Answer

When competitive markets exist for the intermediate product,then market-based transfer pricing is useful for subunit performance but with cost-based transfer pricing,subunit evaluation is more difficult unless the transfer price exceeds the full cost and even then,it is somewhat arbitrary.

Question 11

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 12

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)the...

Question 13

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 incremental costs of producing the product as well as the opportunity cost of selling it to the external market. Therefore, the minimum transfer price equals incremental costs plus opportunity costs.

Question 14

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

Minimum transfer price should cover the incremental cost incurred by the selling subunit up to the point of transfer, and also include the opportunity cost of selling internally. Therefore, option A is the correct choice as it includes both factors in the calculation of minimum transfer price. Option B includes sunk costs which are irrelevant for decision making, while option C includes historical costs which are irrelevant for decision making in the current period. Option D only includes cost and doesn't account for opportunity cost.

Question 15

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 16

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 17

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 18

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 the supplying division to set prices based on their costs, rather than market prices, which can insulate managers from market realities and fluctuations. This is because the revenues of the supplying division are determined by the costs they incur, rather than the prices they are charging in the market.

Question 19

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

In analyzing transfer prices, the seller will not willingly sell a product for less than the incremental costs incurred to make the product. This is because selling a product below incremental costs would result in losses for the seller. The buyer, on the other hand, may be willing to pay a price higher than the seller's incremental costs (ceiling transfer price) if the product has a high demand in the market or if it is not available from other sources. However, the buyer will not pay less than the ceiling transfer price, as doing so would result in missed opportunity costs of not buying from an alternative source or producing the product internally.

Question 20

Dual pricing is not widely used.Explain its disadvantages.

Accepted Answer

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

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

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

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

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.

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?

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 ________.

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.

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

In markets that are not perfectly competitive,________.

The minimum transfer price equals ________.

Which of the following denotes minimum transfer price?

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?

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.