Topic 7 – Transfer Pricing
1. A product may be passed from one subunit to another subunit in the same
organization. The product is known as
a. an interdepartmental product.
b. an intermediate product.
c. a subunit product.
d. a transfer product.
Answer: b
2. Transfer prices should be judged by
a. whether they promote goal congruence.
b. whether they promote the balanced scorecard method.
c. whether they promote a high level of subunit autonomy in decision making.
d. both (a) and (c).
Answer: d
3. A transfer-pricing method leads to goal congruence when
a. managers always act in their own best interest.
b. managers act in their own best interest and the decision is in the long-term
best interest of the manager's subunit.
c. managers act in their own best interest and the decision is in the long-term
best interest of the company.
d. managers act in their own best interest and the decision is in the short-term
best interest of the company.
Answer: c
4. Negotiated transfer prices are often employed when
a. market prices are stable.
b. market prices are volatile.
c. market prices change by a regular percentage each year.
d. goal congruence is not a major objective.
Answer: b
THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 5 THROUGH 7.
Dakoil Corporation has two divisions, Refining and Production. The company's primary
product is Enkoil Oil. Each division's costs are provided below:
Production: Variable costs per barrel of oil $ 3
Fixed costs per barrel of oil $ 2
Refining: Variable costs per barrel of oil $10
Fixed costs per barrel of oil $12
The Refining Division has been operating at a capacity of 40,000 barrels a day and
usually purchases 25,000 barrels of oil from the Production Division and 15,000 barrels
from other suppliers at $20 per barrel.
5. What is the transfer price per barrel from the Production Division to the Refining
Division, assuming the method used to place a value on each barrel of oil is 180%
of variable costs?
a. $5.40
b. $9.00
c. $18.00
d. $23.40
Answer: a
1.8 x $3 = $5.40
6. What is the transfer price per barrel from the Production Division to the Refining
Division, assuming the method used to place a value on each barrel of oil is 110%
of full costs?
a. $5.50
b. $22.00
c. $24.20
d. $29.70
Answer: a
1.10 x ($3 + $2) = $5.50
7. Assume 200 barrels are transferred from the Production Division to the Refining
Division for a transfer price of $6 per barrel. The Refining Division sells the 200
barrels at a price of $40 each to customers. What is the operating income of both
divisions together?
a. $2,400
b. $2,600
c. $3,600
d. $6,800
Answer: b
Revenues = ($40 x 200)= $8,000
Cost = ($3 + $2 + $10 + $12) x 200 = 5,400
Operating income $2,600
8. Transferring products or services at market prices generally leads to optimal
decisions when
a. the market for the intermediate product is perfectly competitive.
b. the interdependencies of the subunits are minimal.
c. there are no additional costs or benefits to the company in buying or selling in
the external market.
d. all of the above are needed for optimal decisions.
Answer: d
9. A benefit of using a market-based transfer price is
a. the profits of the transferring division are sacrificed for the overall good of the
corporation.
b. the profits of the division receiving the products are sacrificed for the overall
good of the corporation.
c. the economic viability and profitability of each division can be evaluated
individually.
d. none of the above.
Answer: c
10. When an industry has excess capacity, market prices may drop well below their
historical average. If this drop is temporary, it is called
a. distress prices.
b. dropped prices.
c. low-average prices.
d. substitute prices.
Answer: a
11. The minimum transfer price equals
a. opportunity costs less the additional outlay costs.
b. opportunity costs times 125% plus the additional outlay costs.
c. opportunity costs divided by the additional outlay costs.
d. incremental costs plus opportunity costs.
Answer: d
12. The seller of Product A has no idle capacity and can sell all it can produce at $20
per unit. Outlay cost is $4. What is the opportunity cost, assuming the seller sells
internally?
a. $4
b. $16
c. $20
d. $24
Answer: b
$20 - $4 = $16
13. Which of the different transfer-pricing methods preserves sub-unit autonomy?
a. Market-based transfer pricing
b. Cost-based transfer pricing
c. Negotiated transfer pricing
d. Both (a) and (c)
Answer: d
14. In analyzing transfer prices,
a. the buyer will not willingly purchase a product for less than the incremental
costs incurred to manufacture the product internally.
b. the seller will not willingly sell a product for less than the incremental costs
incurred to make the product.
c. the buyer will willingly pay more than the ceiling transfer price.
d. the buyer will not pay less than the ceiling transfer price.
Answer: b
15. Crush Company makes internal transfers at 160% of full cost. The Soda Refining
Division purchases 40,000 containers of carbonated water per day, on average, from
a local supplier, who delivers the water for $40 per container via an external
shipper. In order to reduce costs, the company located an independent supplier in
Illinois who is willing to sell 40,000 containers at $30 each, delivered to Crush
Company's Shipping Division in Missouri. The company's Shipping Division in
Missouri has excess capacity and can ship the 40,000 containers at a variable cost of
$4.50 per container. What is the total cost of purchasing the water from the Illinois
supplier and shipping it to the Soda Division?
a. $1,200,000
b. $1,380,000
c. $1,600,000
d. $180,000
Answer: b
40,000 containers x ($4.50 + $30.00) = $1,380,000
THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 16 THROUGH 20.
Calculate the Division operating income for the BetaShoe Company which manufacturers
only one type of shoe and has two divisions, the Sole Division, and the Assembly
Division. The Sole Division manufactures soles for the Assembly Division, which
completes the shoe and sells it to retailers. The Sole Division "sells" soles to the
Assembly Division. The market price for the Assembly Division to purchase a pair of
soles is $20. (Ignore changes in inventory.) The fixed costs for the Sole Division are
assumed to be the same over the range of 40,000-100,000 units. The fixed costs for the
Assembly Division are assumed to be $7 per pair at 100,000 units.
Sole's costs per pair of soles are:
Direct materials $4
Direct labor $3
Variable overhead $2
Division fixed costs $1
Assembly's costs per completed pair of shoes are:
Direct materials $6
Direct labor $2
Variable overhead $1
Division fixed costs $7
16. What is the market-based transfer price per pair of soles from the Sole Division to
the Assembly Division?
a. $10
b. $16
c. $20
d. $26
Answer: c
$20 as given in the problem.
17. What is the transfer price per pair of soles from the Sole Division to the Assembly
Division if the method used to place a value on each pair of soles is 180% of
variable costs?
a. $14.40
b. $12.60
c. $16.20
d. $28.80
Answer: c
$9 x 1.8 = $16.20
18. What is the transfer price per pair of shoes from the Sole Division to the Assembly
Division per pair of soles if the transfer price per pair of soles is 125% of full costs?
a. $10
b. $12.50
c. $13
d. $15
Answer: b
$10 x 1.25 = $12.50
19. Calculate and compare the difference in overall corporate net income between
Scenario A and Scenario B if the Assembly Division sells 100,000 pairs of shoes
for $60 per pair to customers.
Scenario A: Negotiated transfer price of $15 per pair of soles
Scenario B: Market-based transfer price
a. $500,000 more net income under Scenario A
b. $500,000 of net income using Scenario B
c. $100,000 of net income using Scenario A.
d. none of the above
Answer: d
The net income would be the same under both scenarios.
20. Assume the transfer price for a pair of soles is 180% of total costs of the Sole
Division and 40,000 of soles are produced and transferred to the Assembly
Division. The Sole Division's operating income is
a. $320,000
b. $360,000
c. $400,000
d. $440,000
Answer: a
Revenue ($18 x 40,000) = $720,000
Costs ($10 x 40,000) = 400,000
Operating income $320,000
