Transfer Pricing Test Bank Answers Chapter 15

Fundamentals of Cost Accounting, 6e (Lanen)

Chapter 15 Transfer Pricing

1) A transfer price is the value assigned to the transfer of goods or services between divisions within the same organization.

2) Transfer prices are not used to record the exchange between two cost centers within the same organization.

3) Transfer prices cannot be used for decision making, product costing, or performance evaluation.

4) From an organization's viewpoint, transfer prices have no effect on total profits assuming the transfer occurs between two responsibility centers. 

5) If a transfer has no effect on divisional profit, risk-neutral managers will be indifferent between making the transfer or not.

6) If an intermediate market exists but divisions are prohibited from buying or selling from the outside, the intermediate market can be ignored in determining the optimal transfer price.

7) A perfect intermediate market exists if buyers can buy and sellers can sell outside of the organization.

8) When a perfect intermediate market exists, the optimal transfer price is the intermediate market price.

9) In general, the optimal transfer price for a division is the sum of its outlay costs and the opportunity cost of not transferring its goods to another division.

10) The use of an optimal transfer price eliminates potential conflicts between an organization's interests and the divisional manager's interest.

11) A market price-based transfer pricing policy allows the selling division to determine the price for transfers between divisions within the same organization. 

12) A selling division at capacity is indifferent between selling to outsiders and transferring inside at the market price.

13) When actual costs are used as the basis for a transfer, inefficiencies of the selling division are transferred to the buying division.

14) A transfer made at cost does not motivate the selling division to transfer its goods or services internally.

15) In general, negotiated transfer prices fall in a range between the selling division's differential costs and the buying division's market price.

16) In the United States, more companies use cost-based transfer prices than market-based transfer prices.

17) In interstate transactions, transfers can reduce an organization's tax liability when the selling division is in a lower tax jurisdiction than the buying division.

18) Tax avoidance is unethical when inflated transfer prices are used in international transactions to shift profits from a division in one country to a division in another country.

19) An organization that has significant foreign operations must disclose how its transfer prices are established between domestic and foreign divisions.

20) The GAAP financial reporting rules for segments require that all companies use transfer prices based on market prices.

21) Which of the following statements is(are) false?

(A) From an organization's viewpoint, transfer prices have no effect on total profits assuming the transfer occurs between two responsibility centers.

(B) A transfer price is the value assigned to the transfer of goods or services between divisions within the same organization.

A) Only A is false.

B) Only B is false.

C) Both of these are false.

D) Neither of these is false.

22) Which of the following responsibility centers is affected by the use of market-based transfer prices?

A) Cost center.

B) Profit center.

C) Revenue center.

D) Production center.

23) Transfer prices are used for all of the following except:  

A) decision making.

B) product costing.

C) performance evaluation.

D) generation of overall organization profit.

24) A division can sell externally for $60 per unit. Its variable manufacturing costs are $35 per unit, and its variable marketing costs are $12 per unit. What is the opportunity cost of transferring internally, assuming the division is operating at capacity?

A) $13.

B) $25.

C) $35.

D) $47.

25) A division can sell externally for $60 per unit. Its variable manufacturing costs are $35 per unit, and its variable marketing costs are $12 per unit. What is the optimal transfer price for transferring internally, assuming the division is operating at capacity?

A) $12.

B) $35.

C) $47.

D) $60.

26) Division A has variable manufacturing costs of $50 per unit and fixed costs of $10 per unit. Assuming that Division A is operating at capacity, what is the opportunity cost of an internal transfer when the market price is $75?

A) $20.

B) $25.

C) $50.

D) $60.

27) Division A has variable manufacturing costs of $50 per unit and fixed costs of $10 per unit. Assuming that Division A is operating at capacity, what is the optimal transfer price of an internal transfer when the market price is $75?

A) $20.

B) $25.

C) $50.

D) $75.

28) Division A has variable manufacturing costs of $50 per unit and fixed costs of $10 per unit. Assuming that Division A is operating significantly below capacity, what is the optimal transfer price of an internal transfer when the market price is $75?

A) $20.

B) $25.

C) $50.

D) $60.

29) Division B has variable manufacturing costs of $50 per unit and fixed costs of $10 per unit. Assuming that Division B is operating significantly below capacity, what is the opportunity cost of an internal transfer when the market price is $75?

A) $0.

B) $25.

C) $50.

D) $60.

30) Dockside Enterprises Incorporated operates two divisions: (1) a management division that owns and manages bulk carriers on the Great Lakes and (2) a repair division that operates a dry dock in Tampa, Florida. The repair division works on company ships and outside large-hull ships. The repair division has an estimated variable cost of $37 per labor-hour, has a backlog of work for outside ships, and charges $70.00 per hour for labor, which is standard for this type of work. The management division complained that it could hire its own repair workers for $45.00 per hour, including leasing an adequate work area.

What is the minimum transfer price per hour that the repair division should obtain for its services, assuming it is operating at capacity?

A) $33.00.

B) $37.00.

C) $45.00.

D) $70.00.

31) Dockside Enterprises Incorporated operates two divisions: (1) a management division that owns and manages bulk carriers on the Great Lakes and (2) a repair division that operates a dry dock in Tampa, Florida. The repair division works on company ships and outside large-hull ships. The repair division has an estimated variable cost of $37 per labor-hour, has a backlog of work for outside ships, and charges $70.00 per hour for labor, which is standard for this type of work. The management division complained that it could hire its own repair workers for $45.00 per hour, including leasing an adequate work area.

What is the maximum transfer price per hour that the management division should pay?

A) $33.00.

B) $37.00.

C) $45.00.

D) $70.00.

32) Dockside Enterprises Incorporated operates two divisions: (1) a management division that owns and manages bulk carriers on the Great Lakes and (2) a repair division that operates a dry dock in Tampa, Florida. The repair division works on company ships and outside large-hull ships. The repair division has an estimated variable cost of $37 per labor-hour, has a backlog of work for outside ships, and charges $70.00 per hour for labor, which is standard for this type of work. The management division complained that it could hire its own repair workers for $45.00 per hour, including leasing an adequate work area.

If the repair division had idle capacity, what is the minimum transfer price that the repair division should obtain?

A) $33.00.

B) $37.00.

C) $45.00.

D) $70.00.

33) You have been provided with the following information for Division X of a decentralized company:

Division Y of the same company would like to purchase all of its units internally. Division Y needs 6,000 units each period and currently pays $84 per unit to an outside firm. What is the lowest price that Division X could accept from Division Y? (Assume that Division Y wants to use a sole supplier and will not purchase less than 6,000 from a supplier.)

A) $90.

B) $84.

C) $80.

D) $66.

34) When the selling division in an internal transfer has unsatisfied demand from outside customers for the product that is being transferred, the lowest acceptable transfer price for the selling division is:  

A) the variable cost of producing a unit of product.

B) the full absorption cost of producing a unit of product.

C) the market price charged to outside customers, less costs saved by transferring internally.

D) the amount that the purchasing division would have to pay an outside seller to acquire a similar product for its use.

35) Division A makes a part that it sells to customers outside of the company. Data concerning this part appear below:

Division B of the same company would like to use the part manufactured by Division A in one of its products. Division B currently purchases a similar part made by an outside company for $70 per unit and would substitute the part made by Division A. Division B requires 5,000 units of the part each period. Division A can already sell all of the units it can produce on the outside market. What should be the lowest acceptable transfer price from the perspective of Division A?

A) $75.

B) $66.

C) $16.

D) $50.

36) Part 43X costs the Southern Division of Norris Corporation $26 to produce.  Making up that cost are direct materials of $10, direct labor of $4, variable manufacturing overhead of $9, and fixed manufacturing overhead of $3. Southern Division sells Part 43X to other companies for $30. The Northern Division of Norris Corporation can use Part 43X in one of its products. The Southern Division has enough idle capacity to produce all of the units of Part 43X that the Northern Division would require. What is the lowest transfer price at which the Southern Division should be willing to sell Part 43X to the Northern Division?  

A) $30.

B) $26.

C) $23.

D) $27.

37) The Wheel Division of Frankov Corporation has the capacity for making 75,000 wheel sets per year and regularly sells 60,000 each year on the outside market. The regular sales price is $100 per wheel set, and the variable production cost per unit is $65. The Retail Division of Frankov Corporation currently buys 30,000 wheel sets (of the kind made by the Wheel Division) yearly from an outside supplier at a price of $90 per wheel set. If the Retail Division were to buy the 30,000 wheel sets it needs annually from the Wheel Division at a transfer price of $87 per wheel set, the change in annual net operating income for the company as a whole would be:  

A) $600,000.

B) $225,000.

C) $750,000.

D) $135,000.

38) Division X makes a part that it sells to customers outside of the company. Data concerning this part appear below:

Division Y of the same company would like to use the part manufactured by Division X in one of its products. Division Y currently purchases a similar part made by an outside company for $49 per unit and would substitute the part made by Division X. Division Y requires 5,000 units of the part each period. Division X has ample excess capacity to handle all of Division Y's needs without any increase in fixed costs and without impacting outside sales. What is the lowest acceptable transfer price from the standpoint of the selling division?  

A) $50.

B) $49.

C) $46.

D) $30.

39) Division A makes a part that it sells to customers outside of the company. Data concerning this part appear below:

Division B of the same company would like to use the part manufactured by Division A in one of its products. Division B currently purchases a similar part made by an outside company for $38 per unit and would substitute the part made by Division A. Division B requires 5,000 units of the part each period. Division A has ample capacity to produce the units for Division B without any increase in fixed costs and without impacting sales to outside customers. If Division A sells to Division B, the variable cost per unit would be $1 lower than when selling to outside customers. What should be the lowest acceptable transfer price from the perspective of Division A?  

A) $40.

B) $38.

C) $30.

D) $29.

40) The Raisin Division of Trail Mix Foods, Incorporated had the following operating results last year:

Raisin expects identical operating results this year. The Raisin Division has the ability to produce and sell 200,000 pounds of raisins annually.

Assume that the Peanut Division of Trail Mix Foods wants to purchase an additional 20,000 pounds of raisins from the Raisin Division. Raisin will be able to increase its profit by accepting any transfer price above:

A) $0.25 per pound.

B) $0.08 per pound.

C) $0.15 per pound.

D) $0.40 per pound.

41) The Raisin Division of Trail Mix Foods, Incorporated had the following operating results last year:

Raisin expects identical operating results this year.

Assume that the Raisin Division is currently operating at its capacity of 150,000 pounds of raisins. Also assume that the Peanut Division wants to purchase an additional 20,000 pounds of raisins from the Raisin Division. Under these conditions, what amount per pound of raisins would the Raisin Division have to charge the Peanut Division in order to maintain its current profit?  

A) $0.40 per pound.

B) $0.08 per pound.

C) $0.15 per pound.

D) $0.25 per pound.

42) The Gear Division makes a part with the following characteristics:

The Motor Division of the same company would like to purchase 10,000 units each period from the Gear Division. The Motor Division now purchases the part from an outside supplier at a price of $17 each.

Suppose the Gear Division has ample excess capacity to handle all of the Motor Division's needs without any increase in fixed costs and without impacting sales to outside customers. If the Gear Division refuses to accept the $17 price internally and the Motor Division continues to buy from the outside supplier, the company as a whole will be:  

A) worse off by $70,000 each period.

B) better off by $10,000 each period.

C) worse off by $60,000 each period.

D) worse off by $20,000 each period.

43) The Gear Division makes a part with the following characteristics:

The Motor Division of the same company would like to purchase 10,000 units each period from the Gear Division. The Motor Division now purchases the part from an outside supplier at a price of $17 each.

Suppose that the Gear Division is operating at capacity and can sell all of its output to outside customers. If the Gear Division sells the parts to Motor Division at $17 per unit, the company as a whole will be:

A) better off by $10,000 each period.

B) worse off by $20,000 each period.

C) worse off by $10,000 each period.

D) There will be no change in the status of the company as a whole.

44) Division A produces a part with the following characteristics:

Division B, another division in the company, would like to buy this part from Division A. Division B is currently purchasing the part from an outside source at $28 per unit. If Division A sells to Division B, $1 in variable costs can be avoided.

Suppose Division A is currently operating at capacity and can sell all of the units it produces on the outside market for its usual selling price. From the point of view of Division A, any sales to Division B should be priced no lower than:

A) $27.

B) $29.

C) $20.

D) $28.

45) Division A produces a part with the following characteristics:

Division B, another division in the company, would like to buy this part from Division A. Division B is currently purchasing the part from an outside source at $28 per unit. If Division A sells to Division B, $1 in variable costs can be avoided.

Suppose that Division A has ample idle capacity to handle all of Division B's needs without any increase in fixed costs and without impacting sales to outside customers. From the point of view of Division A, any sales to Division B should be priced no lower than:  

A) $29.

B) $30.

C) $18.

D) $17.

46) The Pillar Division of the Gothic Building Company produces basic pillars which can be sold to outside customers or sold to the Lantern Division of the Gothic Company. The Lantern Division wants to purchase 25,000 pillars from the Pillar Division. The following data are available for last year's activities of the Pillar Division:

The total fixed costs would be the same for all the alternatives considered.

Suppose there is ample capacity so that transfers of the pillars to the Lantern Division do not impact sales to outside customers. What is the lowest transfer price that would not reduce the profits of the Pillar Division?  

A) $0.90.

B) $1.35.

C) $1.41.

D) $1.75.

47) The Pillar Division of the Gothic Building Company produces basic pillars which can be sold to outside customers or sold to the Lantern Division of the Gothic Company. The Lantern Division wants to purchase 25,000 pillars from the Pillar Division. The following data are available for last year's activities of the Pillar Division:

The total fixed costs would be the same for all the alternatives considered.

Suppose the transfers of pillars to the Lantern Division would reduce sales to outside customers by 15,000 units. What is the lowest transfer price that would not reduce the profits of the Pillar Division?  

A) $0.90.

B) $1.35.

C) $1.41.

D) $1.75.

48) The Pillar Division of the Gothic Building Company produces basic pillars which can be sold to outside customers or sold to the Lantern Division of the Gothic Company. The Lantern Division wants to buy 25,000 pillars from the Pillar Division. The following data are available for last year's activities of the Pillar Division:

The total fixed costs would be the same for all the alternatives considered.

Suppose the transfers of pillars to the Lantern Division would reduce sales to outside customers by 15,000 units. Further suppose that an outside supplier is willing to provide the Lantern Division with basic pillars at $1.45 each. If the Lantern Division had chosen to buy all of its pillars from the outside supplier instead of the Pillar Division, the change in net operating income for the company as a whole would have been:  

A) $1,250 decrease.

B) $10,250 increase.

C) $1,000 decrease.

D) $13,750 decrease.

49) The Stake Division of the Outdoor Lumination Company produces stakes which can be sold to outside customers or transferred to the Solar Light Division of the Outdoor Lumination Company. Last year, the Solar Light Division bought 50,000 stakes from the Stake Division. The following data are available for last year's activities in the Stake Division:

In order to sell 50,000 stakes to the Solar Light Division, the Stake Division had to give up sales of 30,000 stakes to outside customers. That is, the Stake Division could sell 380,000 stakes each year to outside customers (rather than only 350,000 stakes as shown above) if it were not making sales to the Solar Light Division.

What is the lowest acceptable transfer price from the viewpoint of the selling division?  

A) $2.50.

B) $2.00.

C) $2.60.

D) $3.00.

50) The Stake Division of the Outdoor Lumination Company produces stakes which can be sold to outside customers or transferred to the Solar Light Division of the Outdoor Lumination Company. Last year, the Solar Light Division bought 50,000 stakes from the Stake Division. The following data are available for last year's activities in the Stake Division:

In order to sell 50,000 stakes to the Solar Light Division, the Stake Division had to give up sales of 30,000 stakes to outside customers. That is, the Stake Division could sell 380,000 stakes each year to outside customers (rather than only 350,000 stakes as shown above) if it were not making sales to the Solar Light Division.

Suppose that last year an outside supplier would have been willing to provide the Solar Light Division with the basic stakes at $2.10 each. If the Solar Light Division had chosen to buy all of its stakes from the outside supplier instead of the Stake Division, the change in net operating income for the company as a whole would have been:

A) $45,000 increase.

B) $20,000 decrease.

C) $20,000 increase.

D) $25,000 increase.

51) Division X makes a part that it sells to customers outside of the company. Data concerning this part appear below:

Division Y of the same company would like to use the part manufactured by Division X in one of its products. Division Y currently purchases a similar part made by an outside company for $49 per unit and would substitute the part made by Division X. Division Y requires 5,000 units of the part each period. Division X can sell all of the units it makes to outside customers. What is the lowest acceptable transfer price from the standpoint of the selling division?

A) $50.

B) $49.

C) $46.

D) $30.

52) Division X of Operandi Corporation makes and sells a single product which is used by manufacturers of fork lift trucks. Currently, it sells 12,000 units per year to outside customers at $24 per unit. The annual capacity is 20,000 units and the variable costs to make each unit is $16. Division Y of Operandi Corporation would like to buy 10,000 units a year from Division X 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 X?  

A) $24.00.

B) $21.40.

C) $17.60.

D) $16.00.

53) Division A of Chappelle Company has the capacity for making 3,000 motors per month and regularly sells 1,950 motors each month to outside customers at a contribution margin of $62 per motor. The variable cost per motor is $35.70. Division B of Chappelle Company would like to obtain 1,400 motors each month from Division A. What should be the lowest acceptable transfer price from the perspective of Division A?  

A) $26.57.

B) $51.20.

C) $35.70.

D) $62.00.

54) Which of the following statements is(are) true? 

(A) If a transfer has no effect on divisional profit, managers will be indifferent between making the transfer or not.

(B) If an intermediate market exists but divisions are prohibited from buying or selling from the outside, the intermediate market can be ignored in determining the optimal transfer price.

A) Only A is true.

B) Only B is true.

C) Both of these are true.

D) Neither of these is true.

55) In general, if a potential transfer has no effect on divisional profits:

A) no transfer will take place between the divisions.

B) managers will be indifferent between making the transfer or not.

C) the organization should not intervene to force a transfer.

D) the optimal transfer price is the opportunity cost for the buying division.

56) An intermediate market is perfect when:

A) there are no quality differences between inside and outside suppliers.

B) there are quality differences between inside and outside customers.

C) buyers and sellers can sell any quantity without affecting the market price.

D) buyers and sellers are motivated to make decisions that are consistent with those of the organization.

57) When there is no intermediate market:

A) there is no optimal transfer price.

B) the selling division cannot transfer its goods internally.

C) the buying division cannot purchase its goods externally.

D) there is no reason for top management to intervene in transfer pricing disputes.

58) The general principle on setting transfer prices that are in the organization's best interests is:

A) outlay cost plus opportunity cost of the resource at the point of transfer.

B) only variable costs plus opportunity cost of the resource at the point of transfer.

C) lost contribution margin less the allocated fixed costs for the selling division.

D) gross margin for the buying division plus the gross margin for the selling division.

59) If the selling division has excess capacity, the transfer price should be set at its:

A) outlay costs.

B) outlay costs plus the foregone contribution to the organization of making the transfer internally.

C) selling price less the variable costs.

D) selling price less the variable costs plus the foregone contribution to the organization of making the transfer internally.

60) Given a competitive outside market for identical intermediate goods, what is the best transfer price, assuming all relevant information is readily available?

A) Standard production cost per unit.

B) Market price of the intermediate goods.

C) Actual full cost per unit plus a normal markup.

D) Market price of the final goods less any opportunity costs.

61) The optimal transfer price when there are intermediate markets and the seller is operating at capacity is normally the:  

A) full cost.

B) outlay cost.

C) variable cost.

D) market price.

62) A division can sell externally for $40 per unit. Its variable manufacturing costs are $15 per unit, and its variable marketing costs are $6 per unit. What is the opportunity cost of transferring internally, assuming the division is operating at capacity?

A) $15.

B) $19.

C) $21.

D) $25.

63) Division A has variable manufacturing costs of $25 per unit and fixed costs of $5 per unit. Division A is operating at capacity. What is the opportunity cost of an internal transfer when the market price is $35? 

A) $5.

B) $10.

C) $25.

D) $30.

64) Lock Division of Morgantown Corporation sells 80,000 units of part Z-25 to the outside market. Part Z-25 sells for $40, has a variable cost of $22, and a fixed cost per unit of $10. The Lock Division has a capacity to produce 100,000 units per period. The Cabinet Division currently purchases 10,000 units of part Z-25 from the Lock Division for $40. The Cabinet Division has been approached by an outside supplier willing to supply the parts for $36. What is the effect on Morgantown's overall profit if the Lock Division refuses to sell at the outside supplier's price and the Cabinet Division decides to buy outside? 

A) No change in Morgantown's profits.

B) $140,000 decrease in Morgantown's profits.

C) $80,000 decrease in Morgantown's profits.

D) $40,000 increase in Morgantown's profits.

65) The Lock Division of Morgantown Corporation sells 80,000 units of part Z-25 to the outside market. Part Z-25 sells for $40, has a variable cost of $22, and a fixed cost per unit of $10. The Lock Division has a capacity to produce 100,000 units per period. The Cabinet Division currently purchases 10,000 units of part Z-25 from the Lock Division for $40. The Cabinet Division has been approached by an outside supplier willing to supply the parts for $36. What is the effect on Morgantown's overall profit if the Lock Division agrees to sell to the Cabinet Division at the outside supplier's price and the Cabinet Division continues to buy inside? 

A) No change in Morgantown's profits.

B) $140,000 decrease in Morgantown's profits.

C) $80,000 decrease in Morgantown's profits.

D) $40,000 increase in Morgantown's profits.

66) Concrete Corporation has two producing centers, Contractor and Retailer. The Contractor Division has a variable cost of $12 for its products and a total fixed cost of $120,000. The Contractor Division also has idle capacity for up to 50,000 units per month. The Retailer Division would like to purchase 20,000 units of the Contractor Division's products per month but is unable to convince the Contractor Division to transfer units to the Retailer Division at $16 per unit. The Contractor Division has consistently argued that the market price of $20 is nonnegotiable. What is The Contractor Division's opportunity cost of not transferring units to the Retailer Division?  

A) $20.

B) $12.

C) $8.

D) $4.

67) You have been provided with the following information for the Wool Division of a decentralized company:

The Blanket Division would like to purchase all of its units internally. The Blanket Division needs 6,000 units each period and currently pays $42 per unit to an outside firm. Assuming that the Blanket Division wants to use a sole supplier and will not purchase less than 6,000 from a supplier, what is the lowest price that Wool Division should accept from the Blanket Division?  

A) $45.

B) $42.

C) $40.

D) $38.

68) Given the following data for Keyboard Division:

The Computer Division would like to purchase 15,000 units each period from the Keyboard Division. The Keyboard Division has ample excess capacity to handle all of the Computer Division's needs. The Computer Division now purchases from an outside supplier at a price of $20. If the Keyboard Division refuses to accept an $18 price internally, the company, as a whole, will be worse off by:

A) $30,000.

B) $75,000.

C) $90,000.

D) $120,000.

69) Given the following data for Electrical Cord Division:

Assume that the Electrical Cord Division is selling all it can produce to outside customers. If it sells to the Appliance Division, $1 can be avoided in variable cost per unit. The Appliance Division is presently purchasing from an outside supplier at $38 per unit. From the point of view of the company as a whole, any sales to the Appliance Division should be priced at:  

A) $40.

B) $39.

C) $38.

D) The company would not want the transfer to take place.

70) Given the following data for Handle Division:

The Cabinet Division would like to purchase 10,000 units from the Handle Division at a price of $125 per unit. Handle Division has no excess capacity to handle the Cabinet Division's requirements. The Cabinet Division currently purchases from an outside supplier at a price of $140. If the Handle Division accepts a $125 price internally, the company, as a whole, will be better or worse off by:  

A) $600,000

B) $(100,000)

C) $115,000

D) $250,000

71) Altoona Corporation has two divisions, Hinges and Doors, which are both organized as profit centers. The Hinge Division produces and sells hinges to the Door Division and to outside customers. The Hinge Division has total costs per unit of $35, $20 of which are variable. The Hinge Division is operating significantly below capacity and sells the hinges for $50.

The Door Division has received an offer from an outsider vendor to supply all the hinges it needs (20,000 hinges) at a cost of $45. The manager of the Door Division is considering the offer but wants to approach the Hinge Division first.

What would be the profit impact to Altoona Corporation as a whole if the Door Division purchased the 20,000 hinges it needs from the outside vendor for $45?  

A) No change in profit to Altoona.

B) $100,000 increase in profits.

C) $100,000 decrease in profits.

D) $500,000 decrease in profits.

72) Altoona Corporation has two divisions, Hinges and Doors, which are both organized as profit centers. The Hinge Division produces and sells hinges to the Door Division and to outside customers. The Hinge Division has total costs of $35, $20 of which are variable. The Hinge Division is operating significantly below capacity and sells the hinges for $50.

The Door Division has received an offer from an outsider vendor to supply all the hinges it needs (20,000 hinges) at a cost of $45. The manager of the Door Division is considering the offer but wants to approach the Hinge Division first.

What is the minimum transfer price from the Hinge Division to the Door Division?

A) $20.

B) $35.

C) $45.

D) $50.

73) Altoona Corporation has two divisions, Hinges and Doors, which are both organized as profit centers. The Hinge Division produces and sells hinges to the Door Division and to outside customers. The Hinge Division has total costs of $35, $20 of which are variable. The Hinge Division is operating significantly below capacity and sells the hinges for $50.

The Door Division has received an offer from an outsider vendor to supply all the hinges it needs (20,000 hinges) at a cost of $45. The manager of the Door Division is considering the offer but wants to approach the Hinge Division first.

What is the maximum transfer price that the Door Division would accept from the Hinge Division? 

A) $20.

B) $35.

C) $45.

D) $50.

74) Retro Rides, Incorporated, operates two divisions: (1) a Management Division that owns and manages classic automobile rentals in Miami, Florida and (2) a Repair Division that restores classic automobiles in Clearwater, Florida. The Repair Division works on classic motorcycles, as well as other classic automobiles.

The Repair Division has an estimated variable cost of $28.50 per labor-hour and has a backlog of work for automobile restoration. They charge $48.00 per hour for labor, which is standard for this type of work. The Management Division complained that it could hire its own repair workers for $30.00 per hour, including leasing an adequate work area.

What is the minimum transfer price per hour that the Repair Division should obtain for its services, assuming it is operating at capacity?  

A) $28.50.

B) $30.00.

C) $39.00.

D) $48.00.

75) Retro Rides, Incorporated, operates two divisions: (1) a Management Division that owns and manages classic automobile rentals in Miami, Florida and (2) a Repair Division that restores classic automobiles in Clearwater, Florida. The Repair Division works on classic motorcycles, as well as other classic automobiles.

The Repair Division has an estimated variable cost of $28.50 per labor-hour and has a backlog of work for automobile restoration. They charge $48.00 per hour for labor, which is standard for this type of work. The Management Division complained that it could hire its own repair workers for $30.00 per hour, including leasing an adequate work area.

What is the maximum transfer price per hour that the Management Division should pay?  

A) $28.50.

B) $30.00.

C) $39.00.

D) $46.50.

76) Retro Rides, Incorporated, operates two divisions: (1) a Management Division that owns and manages classic automobile rentals in Miami, Florida and (2) a Repair Division that restores classic automobiles in Clearwater, Florida. The Repair Division works on classic motorcycles, as well as other classic automobiles.

The Repair Division has an estimated variable cost of $28.50 per labor-hour and has a backlog of work for automobile restoration. They charge $48.00 per hour for labor, which is standard for this type of work. The Management Division complained that it could hire its own repair workers for $30.00 per hour, including leasing an adequate work area.

If the Repair Division had idle capacity, what is the minimum transfer price that the Repair Division should obtain?  

A) $28.50.

B) $30.00.

C) $39.00.

D) $46.50.

77) Frocks and Gowns, Incorporated, has two divisions, Day Wear and Night Wear. The Day Wear Division has an investment base of $750,000 and produces and sells 100,000 units of Collars at a market price of $10.00 per unit. Variable costs for the Collars total $3.50 per unit and fixed charges are $4.00 per unit (based on a capacity of 120,000 units). The Night Wear Division wants to purchase 25,000 units of Collars from the Day Wear Division. However, the Night Wear Division is only willing to pay $6.75 per unit.

What is the contribution margin for the Day Wear Division without the transfer to the Night Wear Division?

A) $250,000.

B) $650,000.

C) $675,000.

D) $1,000,000.

78) Frocks and Gowns, Incorporated, has two divisions, Day Wear and Night Wear. The Day Wear Division has an investment base of $750,000 and produces and sells 100,000 units of Collars at a market price of $10.00 per unit. Variable costs for the Collars total $3.50 per unit and fixed charges are $4.00 per unit (based on a capacity of 120,000 units). The Night Wear Division wants to purchase 25,000 units of Collars from the Day Wear Division. However, the Night Wear Division is only willing to pay $6.75 per unit.

What is the contribution margin for the Day Wear Division if it transfers 25,000 units to the Night Wear Division at $6.75 per unit?

A) $250,000.

B) $650,000.

C) $675,000.

D) $698,750.

79) Frocks and Gowns, Incorporated, has two divisions, Day Wear and Night Wear. The Day Wear Division has an investment base of $750,000 and produces and sells 100,000 units of Collars at a market price of $10.00 per unit. Variable costs for the Collars total $3.50 per unit and fixed charges are $4.00 per unit (based on a capacity of 120,000 units). The Night Wear Division wants to purchase 25,000 units of Collars from the Day Wear Division. However, the Night Wear Division is only willing to pay $6.75 per unit.

What is the minimum transfer price that the Day Wear Division would accept for the 25,000 unit order from the Night Wear Division if it wishes to maintain its pre-order contribution margin?  

A) $3.50.

B) $4.00.

C) $4.80.

D) $6.00.

80) A company is highly centralized. The Cutting Division, which is operating at capacity, produces a component that it currently sells in a perfectly competitive market for $13 per unit. At the current level of production, the fixed cost of producing this component is $4 per unit and the variable cost is $7 per unit. The Grinding Division would like to purchase this component from the Cutting Division. The price that the Cutting Division should charge the Grinding Division per unit for this component is:  

A) $7.

B) $11.

C) $13.

D) $15.

81) A company has two divisions, Softwoods and Hardwoods, each operating as a profit center. The Softwood Division charges the Hardwood Division $35 per unit for each unit transferred to the Hardwood Division. Other data for the Softwood Division are as follows:

The Softwood Division is planning to raise its transfer price to $50 per unit. The Hardwood Division can purchase units at $40 per unit from outsiders but doing so would idle the Softwood Division's facilities (now committed to producing units for the Hardwood Division). The Softwood Division cannot increase its sales to outsiders. From the perspective of the company as a whole, from who should the Hardwood Division acquire the units, assuming the Hardwood Division's market is unaffected?  

A) Outside vendors.

B) The Softwood Division, but only at the variable cost per unit.

C) The Softwood Division, but only until fixed costs are covered, then should purchase from outside vendors.

D) The Softwood Division, in spite of the increased transfer price.

82) Given the following information for Camping Division:

The Lantern Division would like to purchase internally from the Camping Division. The Lantern Division now purchases 5,000 units each period from outside suppliers at $49 per unit. The Camping Division has ample excess capacity to handle all of the Lantern Division's needs. What is the lowest price that the Camping Division could accept?  

A) $50.00.

B) $49.00.

C) $46.00.

D) $30.00.

83) Accutron, a large manufacturing company, has several autonomous divisions that sell their products in perfectly competitive external markets as well as internally to the other divisions of the company. Top management expects each of its divisional managers to take actions that will maximize the organization's goal as well as their own goals. Top management also promotes a sustained level of management effort of all of its divisional managers. Under these circumstances, for products exchanged between divisions, the transfer price that will generally lead to optimal decisions for Accutron would be a transfer price equal to the: (CIA adapted)

A) full cost of the product.

B) full cost of the product plus a markup.

C) variable cost of the product plus a markup.

D) market price of the product.

84) Martin Company currently manufactures all component parts used in the manufacturing of various hand tools. The Extruding Division produces a steel handle used in three different tools. The budget for these handles is 120,000 units with the following unit cost:

The Polishing Division purchases 20,000 handles from the Extruding Division and completes the hand tools. An outside supplier, Venture Steel, has offered to supply 20,000 units of the handle to the Polishing Division for $1.25 per unit. The Extruding Division currently has idle capacity that cannot be used.

What is the cost impact to Martin Company as a whole of purchasing from Venture Steel? (CMA adapted)  

A) increase the handle unit cost by $0.05.

B) increase the handle unit cost by $0.15.

C) decrease the handle unit cost by $0.15.

D) decrease the handle unit cost by $0.25.

85) Martin Company currently manufactures all component parts used in the manufacturing of various hand tools. The Extruding Division produces a steel handle used in three different tools. The budget for these handles is 120,000 units with the following unit cost:

The Polishing Division purchases 20,000 handles from the Extruding Division and completes the hand tools. An outside supplier, Venture Steel, has offered to supply 20,000 units of the handle to the Polishing Division for $1.25 per unit. The Extruding Division currently has idle capacity that cannot be used.

If Martin Company would like to develop a range of transfer prices, what would be the maximum transfer price that the Polishing Division would be willing to pay the Extruding Division?  

A) $1.00.

B) $1.10.

C) $1.25.

D) $1.30.

86) Martin Company currently manufactures all component parts used in the manufacturing of various hand tools. The Extruding Division produces a steel handle used in three different tools. The budget for these handles is 120,000 units with the following unit cost:|

The Polishing Division purchases 20,000 handles from the Extruding Division and completes the hand tools. An outside supplier, Venture Steel, has offered to supply 20,000 units of the handle to the Polishing Division for $1.25 per unit. The Extruding Division currently has idle capacity that cannot be used.

If Martin Company would like to develop a range of transfer prices, what would be the minimum transfer price that the Extruding Division would be willing to accept?  

A) $1.00.

B) $1.10.

C) $1.25.

D) $1.30.

87) The Alpha Division of a company, which is operating at capacity, produces and sells 1,000 units of a certain electronic component in a perfectly competitive market. Revenue and cost data are as follows: (CIA adapted)

The minimum transfer price that should be charged to the Beta Division of the same company for each component is:

A) $12.

B) $34.

C) $46.

D) $50.

88) The Hinges Division of Altoona Corporation sells 80,000 units of part Z-25 to the outside market. Part Z-25 sells for $40 and has a variable cost per unit of $22 and a fixed cost per unit of $10. The Hinges Division has a capacity to produce 100,000 units per period. The Door Division currently purchases 10,000 units of part Z-25 from the Hinges Division for $40. The Door Division has been approached by an outside supplier willing to supply the parts for $36. If Altoona uses a negotiated transfer pricing system, what is the maximum transfer price that should be charged for this transaction?  

A) $40.

B) $36.

C) $32.

D) $22.

89) The Hinges Division of Altoona Corporation sells 80,000 units of part Z-25 to the outside market. Part Z-25 sells for $40 and has a variable cost per unit of $22 and a fixed cost per unit of $10. The Hinges Division has a capacity to produce 100,000 units per period. The Door Division currently purchases 10,000 units of part Z-25 from the Hinges Division for $40. The Door Division has been approached by an outside supplier willing to supply the parts for $36. If Altoona uses a negotiated transfer pricing system, what is the minimum transfer price that should be charged for this transaction?  

A) $40.

B) $36.

C) $32.

D) $22.

90) The Eastern Division sells goods internally to the Western Division at Tennessee Company. The quoted external price in industry publications from a supplier near Eastern is $200 per ton plus transportation. It costs $20 per ton to transport the goods to Western. Eastern's actual market cost per ton to buy the direct materials to make the transferred product is $100 and actual per-ton direct labor is $50. Other actual costs of storage and handling are $40. Tennessee Company's president selects a $220 transfer price. This is an example of: (CIA adapted) 

A) market-based transfer pricing.

B) cost-based transfer pricing.

C) negotiated transfer pricing.

D) cost plus 20% transfer pricing.

91) Which of the following is the most significant disadvantage of a cost-based transfer price? (CIA adapted)

A) Requires internally developed information.

B) Imposes market effects on company operations.

C) Requires externally developed information.

D) May not promote long-term efficiencies.

92) An appropriate transfer price between two divisions of The Fathom Company can be determined from the following data: (CIA adapted)

What is the natural bargaining range for the two divisions?

A) Between $20 and $50.

B) Between $50 and $70.

C) Any amount less than $50.

D) $50 is the only acceptable transfer price.

93) A limitation of transfer prices based on actual cost is that they: (CIA adapted)

A) charge inefficiencies to the department that is transferring the goods.

B) charge inefficiencies to the department that is receiving the goods.

C) must be adjusted by some markup.

D) lack clarity and administrative convenience.

94) Which of the following is not an appropriate use of transfer pricing?

A) Product costing.

B) Decision making.

C) Establishing standard costs.

D) Evaluating performance.

95) An internal transfer between two divisions is in the best economic interests of the entire organization when: 

A) the variable costs plus the opportunity cost of the selling division is greater than the external price for the buying division.

B) the variable costs plus the opportunity cost of the selling division is less than the external price for the buying division.

C) there is excess capacity in the buying division with no alternative use.

D) there is no established market price for the buying division.

96) Top management intervention in settling transfer pricing disputes between two divisions should be avoided unless

A) there is no intermediate market.

B) the intermediate market is imperfect.

C) there is an extraordinarily large order.

D) there are no opportunity costs.

97) The transfer price that should be used by top management in evaluating whether a division should buy within the company or from an outside supplier is the:  

A) negotiated transfer price.

B) transfer price based on full cost.

C) transfer price based on variable cost.

D) transfer price based on an open market price.

98) Some managers prefer to use cost rather than market price in controlling transfers between divisions. If cost is to be used, then it should be:

A) full cost.

B) direct cost.

C) variable cost.

D) standard cost.

99) Cost-based transfer prices that include a normal markup to the costs act as a surrogate for:

A) negotiated market prices.

B) opportunity costs.

C) differential costs.

D) market prices.

100) Multinational firms often face conflicting pressures when developing transfer pricing policies. Tax avoidance results when:

A) inflated transfer prices are used to reduce the profits of divisions in high tax-rate countries.

B) inflated transfer prices are used to reduce the profits of divisions in low tax-rate countries.

C) cost-based transfer prices are used instead of market transfer prices in high tax-rate countries.

D) cost-based transfer prices are used instead of negotiated market transfer prices in low tax-rate countries.

101) Which of the following transfer pricing methods must be used in segment reporting by the oil and gas industry?

A) Absorption cost.

B) Differential cost.

C) Negotiated market price.

D) Market price.

102) Galena Corporation manufactures RD34 in its City Division. This output is sold to the Urban Division as a raw material in the Urban Division's product. The City Division also further processes the RD34 into RD35, and then sells it to other companies.

The City Division's variable costs for the basic ingredient are $15 per unit. The Urban Division's variable costs are $5 per unit in addition to what it pays the City Division. The Urban Division has a capacity of 400,000 units and it can sell everything it produces. The market price for the finished additive is $40 per unit. If the City Division converts the RD34 into RD35, it can receive $25 per unit on the open market, but it incurs an additional $4 per unit for this processing.

Required:

(a) What is the lowest price the City Division should be willing to transfer RD34 to the Urban Division, assuming the City Division is not operating at capacity?

(b) What is the lowest price the City Division should be willing to transfer RD34 to the Urban Division, assuming the City Division is operating at capacity?

(c) Ignore parts (a) and (b). Assume that the City Division has a capacity of 500,000 units but can only sell 300,000 on the open market. How many units should the City Division sell externally and how many units should it sell to Urban Division at a transfer price of $20?  

103) Shipping Industries is a decentralized company that evaluates its divisions based on ROI. The North Division has the capacity to produce 2,000 units of a component. The North Division's variable costs are $85 per unit and fixed costs are $70 per unit.

The South Division can use the North Division's product as a component in one of its products. The South Division would incur $65 of variable costs to convert the component into its own product which sells for $310.

Required (consider each question independently):

(a) Assume the North Division can sell all that it produces for $185 each. The South Division needs 100 units. What is the appropriate transfer price?

(b) Assume the North Division can sell 1,800 units at $265. Any excess capacity will be unused unless the units are purchased by the South Division (which can use up to 100 units). What are the minimum and maximum transfer prices?

104) Trevor Company operates several investment centers. The manager of the Genesis Division expects the following results for the coming year:

Included in the Genesis Division's variable cost is $7 for a component it buys from an outside supplier. One of these components is required in each unit of the Genesis Division's product. The manager of the Genesis Division has just found that she can buy the component from the Solar Division, another division of Trevor Company. The Solar Division sells 300,000 units of the component to outsiders at $8 and its variable cost is $4 per unit. The Solar Division offers to sell the component to Genesis at a price of $6. Solar is operating well below capacity.

Required:

(a) If Genesis accepts the offer, what will happen to the income of the Solar Division?

(b) If Genesis accepts the offer, what will happen to the income of the Genesis Division?

(c) If Genesis accepts the offer, what will happen to the income of the Trevor Company?

105) The Trevor Company operates several investment centers. The manager of the Genesis Division expects the following results for the coming year:

Included in the Genesis Division's variable cost is $7 for a component it buys from an outside supplier. One of these components is required in each unit of the Genesis Division's product. The manager of the Genesis Division has just found that she can buy the component from the Solar Division, another division of Trevor Company. The Solar Division sells 300,000 units of the component to outsiders at $8 and its variable cost is $4 per unit. Solar offers to sell the component to Genesis at a price of $6.

Solar has a capacity of 330,000 units. Assume that Genesis wants to buy all of its needs from one source, so Solar must supply all or none of the Genesis Division's needs for 50,000 units.

Required:

(a) Determine the change in income of the Solar Division of supplying the component to Genesis for $6 per unit as opposed to not supplying the component to Genesis.

(b) Determine the change in income of Trevor Company if Solar supplies the component to Genesis for $6 per unit.  

106) The Barrel Division of Chemco Incorporated has a capacity of 200,000 units and expects the following results in the coming period:

The Tank Division of Chemco Incorporated currently purchases 50,000 units of a part for one of its products from an outside supplier for $4 per unit. The Tank Division's manager believes he could use a minor variation of the Barrel Division's product instead and offers to buy the units from the Barrel Division for $3.50 per unit. Making the variation desired by the Tank Division would cost the Barrel Division an additional $0.50 per unit and would increase the Barrel Division's annual cash fixed costs by $20,000. The Barrel Division's manager agrees to the deal offered by the Tank Division's manager.

Required:

(a) What is the effect of the deal on the Tank Division's income?

(b) What is the effect of the deal on the Barrel Division's income?

(c) What is the effect of the deal on the income of Chemco Incorporated as a whole?  

107) Division A of Spangler Company expects the following results:

Division B has the opportunity to buy the 5,000 units it needs from an outside supplier at $45 each.

Required (consider each question independently):

(a) Division A refuses to meet the $45 price, sales to outsiders cannot be increased, and Division B buys from the outside supplier. Compute the effect on the income of Spangler Company.

(b) Division A cannot increase its sales to outsiders, does meet the $45 price, and Division B continues to buy from Division A. Compute the effect on the income of Spangler Company.  

108) Veritron Division of Argos Incorporated has a capacity of 100,000 units and expects the following results for the year:

Magnatron Division of Argos Incorporated currently purchases 20,000 units of a part for one of its products from an outside supplier at $32 per unit. Magnatron's manager believes she could use a minor variation of Veritron's product instead and offers to buy the units from Veritron for $26 per unit. Making the variation desired by Magnatron would cost Veritron an additional $5 per unit and would increase Veritron's annual cash fixed costs by $80,000. Veritron's manager agrees to the deal offered by Magnatron's manager.

Required:

(a) What is the effect of the deal on Magnatron's income?

(b) What is the effect of the deal on Veritron's income?

(c) What is the effect of the deal on the income of Argos Incorporated as a whole?  

109) Division A of Spangler Company expects the following results:

Division B has the opportunity to buy the 5,000 units it needs from an outside supplier at $45 each. Assume that Division A cannot increase sales to outsiders.

Required:

(a) What would be the optimal transfer price?

(b) Assume that Spangler allows the divisional managers to negotiate transfer prices. What would the maximum transfer price be?

(c) Assume that Spangler allows the divisional managers to negotiate transfer prices. What would the minimum transfer price be?

110) Winton Industries evaluates its divisions based on residual income. The Springfield Division has the capacity to produce 20,000 units of a component. The Springfield Division's variable costs are $150 per unit and fixed costs are $110 per unit.

The Monnett Division can use the Springfield Division's product as a component in one of its products. The Monnett Division would incur $75 of variable costs to convert the component into its own product which sells for $300.

Required (consider each question independently):

(a) Assume the Springfield Division can sell all that it produces for $285 each. The Monnett Division needs 1,000 units. What is the appropriate transfer price?

(b) Assume the Springfield Division can sell 18,000 units at $285. Any excess capacity will be unused unless the units are purchased by the Monnett Division (which can use up to 1,000 units). What are the minimum and maximum transfer prices?

111) Table Lake Cruises, Incorporated, operates two divisions: (1) a Recreational Division that owns and manages charter boats on the lake and (2) a Repair Division that works on small gasoline crafts as well medium-size diesel engine boats. The Repair Division has an estimated variable cost of $45 per labor-hour and has a backlog of work for diesel engines. They charge $125 per hour for labor & overhead, which is standard for this type of work. The Recreational Division complained that it could hire its own repair workers for $85 per hour, including leasing an adequate work area.

Required:

(a) What is the minimum transfer price per hour that the Repair Division should obtain for its services, assuming it is operating at capacity?

(b) What is the maximum transfer price per hour that the Recreational Division should pay?

(c)  If the Repair Division had idle capacity, what is the minimum transfer price that the Repair Division should obtain?  

112) The Counter Division can sell externally for $60 per unit. Its variable manufacturing costs are $35 per unit, and its fixed costs are $12 per unit.

Required:

(a) What is the optimal transfer price for transferring internally, assuming the division is operating at capacity?

(b) What is the optimal transfer price for transferring internally, assuming the division is operating at well below capacity?

113) Salamander Company expects the following results in the coming period:

Included in Division A's costs are 10,000 units of a subcomponent purchased from an outside supplier for $45. The managers have recently initiated negotiations for Division B to supply the components to Division A. Division B has a total capacity of 40,000 units.

Required:

(a) Would the Salamander Company prefer the subcomponent used by A to be purchased internally from B or from the outside vendor?

(b) What would be the maximum and minimum transfer prices?

114) The following segment reporting statement includes Salamander Company's expected results for the coming period:

Included in Division A's costs are 10,000 units of a subcomponent purchased from an outside supplier for $45. The managers have recently initiated negotiations for Division B to supply the components to Division A. Division B has a total capacity of 40,000 units.

Required:

(a) Prepare a new segment reporting statement for the Salamander Company, assuming an internal transfer at the maximum transfer price.

(b) Prepare a new segment reporting statement for the Salamander Company, assuming an internal transfer at the minimum transfer price.

115) Thai Company has two divisions organized as profit centers: Redmon and Tomlin. Thai expects the following results in the coming period:

Included in Redmon's costs are 100,000 units of a subcomponent purchased from an outside supplier for $4.50 per unit. The managers have recently initiated negotiations for Tomlin to supply the components to Redmon. Tomlin has a total capacity of 400,000 units.

Required:

(a) Would Thai Company prefer the subcomponent used by Redmon to be purchased internally from Tomlin or from the outside vendor? What would be the profit impact of this decision?

(b) What would be the maximum and minimum transfer prices?

116) Macon Motor Works has just acquired a new Battery Division. The Battery Division produces a standard 12-volt battery that it sells to retail outlets at a competitive price of $20. The retail outlets purchase about 800,000 batteries a year. Since the Battery Division has a capacity of 1,000,000 batteries per year, top management is thinking that it might be wise for the company's Automotive Division to start purchasing batteries from the newly acquired Battery Division.

The Automotive Division now purchases 300,000 batteries per year from an outside supplier at a price of $18 per battery. The discount from the competitive $20 price is a result of the large quantity purchased.

The Battery Division's cost per battery is shown below:

Fixed costs are based on 1,000,000 batteries.

Both divisions are to be treated as investment centers, and their performance is to be evaluated by the ROI formula.

Required:

(a) What transfer price would you recommend and why?

(b) What transfer price would you recommend if the Battery Division is now selling 1,000,000 batteries a year to retail outlets?

(c) Suppose the manager of the Battery Division can increase its capacity to 1,500,000 units for $1,200,000. She then has the option of (c1) cutting the retail price to $17.50 with the certainty that sales will increase to 1,500,000 batteries, or (c2) maintaining the outside price of $20.00 for the 800,000 batteries and transferring the 300,000 batteries to the Automotive Division at some price that would produce the same income for the Battery Division as option (c1). What is the minimum transfer price you would recommend in the (c2) option?  

117) Chattanooga, Incorporated, has two divisions for its metal fabrication business. The Stamp Division stamps the objects and then transfers them to the Finish Division, which finishes and sells them. Last year, the Stamp Division had administrative expenses of $40,000. The Finish Division incurred additional production costs of $120,000 (exclusive of amounts paid to the Stamp Division for the stamped steel) to process 120,000 units. The Finish Division sold the finished goods for $500,000 and incurred $80,000 in variable selling and administrative expenses.

Required:

(a) Prepare income statements for each division. Use a transfer price of the Stamp Division's total cost plus 5%. Assume Cost of Goods Sold for the Finish Division is $351,000.

(b) Repeat (a), using a transfer price of $2.00 per unit; this is also the market price.

(c) Repeat (a), using a negotiated transfer price of $1.90 per unit.

(d) Which transfer price results in higher income to Chattanooga Incorporated?

118) Division S sells its product to unrelated parties at a price of $20 per unit. It incurs variable costs of $7 per unit and has fixed costs of $50,000 per month. Monthly production is generally 10,000 units.

Division B uses Division S's product in its operations. It can purchase the units from Division S at $20 per unit but must pay $1.50 per unit in shipping costs. Alternatively, Division B can buy from Division S's competition at a delivered price of $21 per unit.

Required:

(a) From the company's perspective, should Division B purchase the units internally or externally? Assume Division S has ample capacity to handle all of Division B's needs.

(b) Would your answer change if Division S can sell everything it produces to outside customers?

119) Calvin Machinery Company manufactures heavy-duty equipment used in foundries, mining operations, and similar operations. The company is decentralized, with various division managers having control over capital investments and most production decisions. The Cylinder Division fabricates a component which is used by the Press Division in its production of metal presses. The Cylinder Division has been selling to the Press Division at a price of $3,000 per unit. Because of a cost increase, the Cylinder Division wants to increase its price to $3,200, even though the Press Division can still purchase an equivalent component externally for $3,000. The following information has been gathered regarding this issue:

Required: (support your answers with appropriate calculations)

(a) If the Press Division buys its units externally, the Cylinder Division will have idle capacity for which there are no alternative uses. Will the company as a whole benefit if the Press Division purchases its units externally for $3,000 per unit?

(b) If the Press Division buys its units externally, the Cylinder Division will have idle capacity which can be used to generate a positive cash flow of $40,000. Will the company as a whole benefit if the Press Division purchases its units externally for $3,000 per unit?

(c) Refer to (b). Will your answer change if the price at which the Press Division can buy externally decreases to $2,700 per unit?

120) The GrowPro Manufacturing Company has a division (Division P) that produces an essential ingredient used by the Lawn Division in making lawn fertilizer. Historically, 75% of Division P's output has been purchased by Division L and 25% has been sold to other fertilizer companies. The transfer price between Division P and Division L has been based on the outside sales price less selling and administrative expenses directly applicable to the outside sales. Last year, the transfer price was $35 per ton and Division P would like the same transfer price this year. However, the general manager of Division L has found an outside supplier who will sell the ingredient for $30 per ton. She would like to continue buying from Division P, but Division P's manager does not want to match the $30 price because he thinks that the margin is too small. Top management does not get involved in transfer pricing disputes, but rather, allows division managers to make their own decisions concerning internal or external purchases and sales.

The following information has been gathered regarding Division P's operations last year:

The information presented above is based on selling 120,000 tons internally and 40,000 tons externally.

Required:

(a) If Division L buys externally, Division P can increase its current external sales by only 20,000 tons. What arguments can the general manager of Division L make to help Division P to match the $30 price?

(b) Division L wants to use only one supplier, so Division P will either sell 120,000 tons to Division L or nothing. If Division L's capacity is 160,000 tons, how many units does Division P need to sell to outsiders at $50 per ton before it is better off selling to outsiders? Ignore any additional marketing costs which would be incurred to increase sales.

121) The Measurement Division of Flow Company produces pumps which it sells for $20 each to outside customers. The Measurement Division's cost per pump, based on normal volume of 500,000 units per period, is shown below:

Flow has recently purchased a small company which makes sprinkler systems. This new company is presently purchasing 100,000 pumps each year from another manufacturer. Since the Measurement Division has a capacity of 600,000 pumps per year and is now selling only 500,000 pumps to outside customers, management would like the new Sprinkler Division to begin purchasing its pumps internally. The Sprinkler Division is now paying $20 per pump, less a 10% quantity discount. The Measurement Division could avoid $1 per unit in variable costs on any sales to the Sprinkler Division.

Required:

(a) Treating each division as an independent profit center, within what price range should the internal sales price fall?

(b) Now assume that the Measurement Division is selling 600,000 pumps per year on the outside. Determine the appropriate transfer price. Show all computations.

122) Finnish Corporation has a Supply Division that does work for other divisions in the company as well as for outside customers. The company's Custodial Products Division has asked the Supply Division to provide it with 10,000 special parts each year. The special parts would require $15.00 per unit in variable production costs.

The Custodial Products Division has a bid from an outside supplier for the special parts at $29.00 per unit. In order to have time and space to produce the special parts, the Supply Division would have to cut back production of another product - the H56 that it is currently producing. The H56 sells for $32.00 per unit and requires $19.00 per unit in variable production costs. Packaging and shipping costs of the H56 are $3.00 per unit. Packaging and shipping costs for the new special part would be only $1.00 per unit. The Supply Division is currently producing and selling 40,000 units of the H56 each year. Production and sales of the H56 would drop by 20% if the new special part is produced for the Custodial Products Division.

Required:

(a) What is the range of transfer prices within which both the Divisions' profits would increase as a result of agreeing to the transfer of 10,000 special parts per year from the Supply Division to the Custodial Products Division?

(b) Is it in the best interests of Finnish Corporation for this transfer to take place? Explain.

123) Division N has asked Division M of the same company to supply it with 10,000 units of part P782 this year to use in one of its products. Division N has received a bid from an outside supplier for the parts at a price of $25.00 per unit. Division M has the capacity to produce 50,000 units of part P782 per year. Division M expects to sell 46,000 units of part P782 to outside customers this year at a price of $26.00 per unit. To fill the order from Division N, Division M would have to cut back its sales to outside customers. Division M produces part P782 at a variable cost of $17.00 per unit. The cost of packing and shipping the parts for outside customers is $1.00 per unit. These packing and shipping costs would not have to be incurred on sales of the parts to Division N.

Required:

(a) What is the range of transfer prices within which both divisions' profits would increase as a result of agreeing to the transfer of 10,000 parts this year from Division M to Division N?

(b) Is it in the best interest of the overall company for this transfer to take place? Explain.

124) Farris Yard Equipment Corporation manufactures lawn mowers and snow blowers. It also manufactures engines that are used by the Lawn Mower Assembly Division (LMAD). The Engine Division (ED) also sells about 40% of its output to the outside market (these are multipurpose engines). ED's annual capacity is 155,000 units and annual output is currently 135,000 units. All engines sold internally to the LMAD are priced at cost plus 20% markup.

In January 2020, the Snow Blower Assembly Division (SBAD) approached the ED to 'buy' 20,000 engines. Diane Rogers, the controller of ED, computed the costs of manufacturing these engines as follows:

Rogers quoted a price of $66.60 for each engine transferred to the SBAD. Jackson White, the manager of SBAD, was furious to note that the ED was "trying to make money off a sister division." He argued that the price must include only the cost of materials, as all other costs will be incurred irrespective of whether or not SBAD places the order for 20,000 engines. Morton Downey, the production manager of ED, pointed out that the special equipment will be purchased only for fulfilling this internal order. Moreover, he argued that inspection must also be done just like on all other engines; therefore, the inspection costs must also be included. Labor is paid a flat monthly salary. Other manufacturing costs include both variable and fixed components (in roughly equal proportion).

Required:

(a) Given that excess capacity exists, what is the minimum price that the ED must charge to the SBAD?

(b) What are the pros and cons of internal sourcing?

125) Allentown Division of Sparks Incorporated transfers its product to the Youngstown Division. The Youngstown Division can either buy the item internally or externally. The cost of purchasing the item externally is $73 per unit. The Allentown Division has just completed its annual cost update as follows:

The Allentown Division is operating at 60 percent of its 400,000 unit capacity.

Required:

a) What is the minimum transfer price the Allentown Division should charge for internal transfers?

b) What is the maximum price the Youngstown Division would be willing to pay?

c) Why should the Allentown Division reduce its price to the Youngstown Division?

126) The following costs exist for the Wiring Division of Coriander Corporation:

The output of the Wiring Division, which sells for $10 per unit externally, is used by the Electrical Harness Division.

Required:

Compute the transfer price for a unit of the Wiring Division's output using:

a) market price.

b) variable production cost plus 30%.

c) absorption cost plus 25%.

d) variable cost.

e) total cost plus 10%.

127) SEMO Incorporated has a division located in Spain and another in the United States. The Spanish Division produces a part needed for the product made by the U.S. Division. There is substantial excess capacity in the Spanish Division. The tax rate of the Spanish Division is 35% and U.S. Division tax rate is 30%.

The part sells externally for $75 and the Spanish division's manufacturing costs are:

Required:

a) What would be the lowest acceptable transfer price for the Spanish division?

b) What would be the highest acceptable transfer price for the U.S. division?

c) What would be the transfer price that would be the best for SEMO Incorporated and why?  

128) The following information is available for the two divisions of MAC Company:

Division A has no excess production capacity.

Required:

a) In order to ensure the best use of the productive capacity of Division A, what transfer price should be set by Division A and what effect does this transfer price have on the overall margin for the company? Is the answer goal congruent under the general rule?

b) Should Division B accept a special order for its product if the selling price is reduced to $70. Use your answer from (a) and explain.

c) Would your answer to (b) change if Division A had excess capacity? Explain.

129) Division X has asked Division K of the Easton Company to supply it with 5,000 units of part L433 this year to use in one of its products. Division X has received a bid from an outside supplier for the parts at a price of $26.00 per unit. Division K has the capacity to produce 30,000 units of part L433 per year. Division K expects to sell 26,000 units of part L433 to outside customers this year at a price of $30.00 per unit. To fill the order from Division X, Division K would have to cut back its sales to outside customers. Division K produces part L433 at a variable cost of $21.00 per unit. The cost of packing and shipping the parts for outside customers is $2.00 per unit. These packing and shipping costs would not have to be incurred on sales of the parts to Division X.

Required:

a. What is the range of transfer prices within which both the divisions' profits would increase as a result of agreeing to the transfer of 5,000 parts this year from Division K to Division X?

b. Is it in the best interest of the Easton Company overall for this transfer to take place? Explain.

130) Pomme Corporation has a Motor Division that does work for other divisions in the company as well as for outside customers. The company's Equipment Division has asked the Motor Division to provide it with 2,000 special motors each year. The special motors would require $17.00 per unit in variable production costs. The Equipment Division has a bid from an outside supplier for the special motors at $28.00 per unit. In order to have time and space to produce the special motor, the Motor Division would have to cut back production of another motor - the J789 that it is currently producing. The J789 sells for $34.00 per unit and requires $22.00 per unit in variable production costs. Packaging and shipping costs of the J789 are $4.00 per unit. Packaging and shipping costs for the new special motor would be only $0.50 per unit. The Motor Division is currently producing and selling 10,000 units of the J789 each year. Production and sales of the J789 would drop by 10% if the new special motor is produced for the Equipment Division.

Required:

a. What is the range of transfer prices within which both the divisions' profits would increase as a result of agreeing to the transfer of 2,000 special motors per year from the Motor Division to the Equipment Division?

b. Is it in the best interest of Pomme Corporation for this transfer to take place? Explain.

131) Randolph Company has two divisions organized as profit centers: Redmon and Tomlin. Randolph expects the following results in the coming period:

Included in Redmon's costs are 100,000 units of a subcomponent purchased from an outside supplier for $4.50. The managers have recently initiated negotiations for Tomlin to supply the components to Redmon. Tomlin has a total capacity of 400,000 units.

Required:

a. Prepare a new segment reporting statement for Randolph, assuming an internal transfer at the maximum transfer price.

b. Prepare a new segment reporting statement for Randolph, assuming an internal transfer at the minimum transfer price.

132) Why is transfer pricing only a concern for profit or investment centers and not for cost or revenue centers?

133) Explain the general principle for determining the optimal transfer price.

134) What is meant by a dual transfer pricing system? What are some advantages and disadvantages of it?

135) What are the limitations of market-based transfer prices?

136) What are the advantages and disadvantages of using a negotiated transfer price?

137) Why is transfer pricing important in tax accounting?

138) What are the principal items that must be disclosed about each segment and how does this differ if a company has significant foreign operations?

139) Hartland Company has used market price as its transfer price for the Sterling Division for many years with no problems. This year, because of changes in the economy, the demand for its final product has dropped along with the price.

Required:

Explain the problems of basing the transfer prices on distress market prices and possible solutions to the problems.

140) Midland Incorporated has two divisions: Production and Marketing, which it treats as profit centers. Because the Production Division has no marketing capabilities, it does not have a traditional market price to consider and the company does not want to use negotiation.

Required:

Discuss the following cost-based transfer prices along with problems that might exist for each.

a) Standard cost.

b) Full absorption cost.

c) Actual cost.

141) Mr. Massee, Vice President of Production, is looking at two of the divisions that report to him. These divisions are viewed as profit centers by the company. He has called in the head of the Brake Division, which provides a part used by the Wheel Division, because he has noticed that the Wheel Division is going to an external supplier for the part. Mr. Omsby, the head of the Brake Division, tells him that he has set the transfer price at $38 per part even though the external price is $33 per part. The standard unit-level cost is $22. "I have set the $38 price because I am operating with no excess capacity and do not want to have the internal transfer to the Wheel Division. I have some good external customers and do not want to lose them by selling internally. If I had excess capacity, I would be willing sell to the Wheel Division at a lower price."

Mr. Massee says that he has to think about this situation because something doesn't seem right to him. After Mr. Omsby leaves the office, he calls his friend in the controller's department for some help.

Required:

Assume you are the friend that Mr. Massee calls. Explain to Mr. Massee the differences in transfer pricing when there is no excess capacity and when there is excess capacity and what Mr. Omsby is doing wrong. 

142) Ms. Clarke, one of the marketing managers, has come to the meeting with a number of reports about one of her products. The Vice President of Marketing sees her agitation and asks her what the problem is. "Well, the product made by the East Coast Division is losing sales even after the price had been lowered drastically. The manager of the division is threatening to close because of the reduced demand."

The Vice President of Marketing asks why the lowered prices are a problem and Ms. Clarke says that, according to the manager, the price used to transfer the goods to the Southern Division are based on market price and, with the lowered market price, the unit-level costs are no longer being covered and he is losing money on every transfer as well as every third-party sale.

Required:

Explain further to the Vice President of Marketing the issues involved in transfer pricing when there are distressed market prices.

143) Briefly discuss some of the general issues of multinational transfer pricing.

144) During the current year, Tuesday Company's foreign Division A incurred production costs of $4 million for units that are transferred to its other foreign Division B. Costs in Division B, outside of the costs of production of the final product, are $8 million. These are third-party costs. Sales revenue for the final product for Division B is $30 million. Other companies in the same country import a similar type of part as Division B at a cost of $7 million. Tuesday has set its transfer price at $14 million, justifying this price because of the special controls it has on the operations in Division A as well as its special manufacturing method. The tax rate in the country where Division A is located is 40% while the tax rate for Division B's country is 70%.

Required:

a) What would Tuesday's total tax liability for both divisions be if it used the $7 million transfer price?

b) What would the total tax liability be if it used the $14 million transfer price?

145) How do import duties affect transfer pricing?

146) Space Incorporated has just purchased a foreign subsidiary that makes a component used by one of the domestic divisions. Ms. Jenner, the controller, has been asked about issues that should be considered in establishing a transfer price for the new subsidiary. Since this is Space's first foray into the multinational arena, there is little to no expertise in international issues in the company. Ms. Jenner has told her boss that she will get back to him with a report as to the issues to be considered. She then calls a friend of hers at a branch of one of the big-four CPA firms that deals with international issues for some help.

Required:

What is the basic information that Ms. Jenner will be given by her friend?

147) Briefly discuss transfer prices in relation to external segment reporting under GAAP.