Theories

1. Transfer-pricing enable managers to focus on maximizing the

performance of their subunits.
a.True
b.False
2. The product or service transferred between subunits of an
organization is called an intermediate product.
a.True
b.False
3. The transfer price creates revenues for the selling subunit and
costs for the buying subunits affecting each subunit’s operating
income.
a.True
b.False
4. A budget is the quantitative expression of a proposed plan of
action by management for a specific time or period
a.True
b.False
5. A budget generally includes both financial and nonfinancial
aspects of plan
a.True
b.False
Problems
Dan Corporation has two divisions, distribution and manufacturing. The
company’s primary product is high-end watches. Each division’s costs
are provided below:
Manufacturing: variable cost per barrel of oil $1
Fixed cost per barrel of oil $5
Distribution: variable cost per barrel of oil $0.60
Fixed cost per barrel of oil $0.40
The distribution division has been operating at a capacity of
4,000,000 units a week and usually purchases 2,000,000 units from the
manufacturing division and 2,000,000 from other suppliers at $9.00 per
unit.
1. What is the transfer price per watch from the manufacturing
division to the distribution division, assuming the method used
to place a value on each watch is 160% of variable cost?
a. $1.00
b. $1.60
c. $2.20
d. $8.00
2. What is the transfer price per watch from the manufacturing
division to the distribution division, assuming the method used
to place a value on each transfer is 120% of full cost?
a. $6.00
b. $7.20
c. $9.00
d. $11.00
Mercado shoe Company manufactures only one type of shoe and has two
divisions, the stitching division and polishing division. The
stitching division manufactures shoes for polishing division, which
completes the shoes and sells it to the retailers. The stitching
division “sells” shoes to the polishing division. The market price for
polishing division to purchase a pair of shoes is $42.00(ignore
changes in inventory). The fixed costs for stitching division are
assumed to be the same over the range of 40,000-100,000 units. The
fixed costs of the polishing division are assumed to be $14 per pair
at 100,000 units.
Stitching’s cost per soles are:
Direct materials $10
Direct labor $8
Variable overhead $6
 Division fixed cost $5
Polishing’s cost per completed pair of shoes are:
Direct materials $14
Direct labor $6
Variable overhead $4
Division fixed cost $16
1. What is the market-based transfer price per pair of shoe from
stitching division to polishing division?
a. $20
b. $32
c. $42
d. $52
2. What is the transfer price per pair of shoes from the stitching
division to the polishing division if the transfer price per sole
is 125% of full costs?
a. $12.50
b. $22.50
c. $30.00
d. $35.00
Patrick corporation has two divisions, refining and extraction. The
company’s primary product is Luboil Oil. Each division’s costs are
provided below:
Extraction: variable cost per barrel of oil $7
Fixed cost per barrel of oil $5
Refining: variable cost per barrel of oil $28
Fixed cost per barrel of oil $32
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
extraction division and 15,000 barrels from other suppliers at $60 per
barrel.
1. What is the transfer price per barrel from the extraction
division to the refining division, assuming the method used to
place a value on each barrel of oil is 180% of variable cost?
a. $12.60
b. $21.60
c. $72.00
d. $130.00
2. What is the transfer price per barrel from the extraction
division to the refining division, assuming the method used to
place a value on each barrel of oil is 110% of full cost?
 a. $12.00
b. $13.20
c. $44.00
d. $79.00
3. Assume 200 barrels are transferred from the extraction division
to the refining division for a transfer price of $18 per barrel.
The refining division sells the 200 barrel at a price of $120
each to customers.
What is the operating income of both divisions?
a. $7,200
b. $9,600
c. $10,800
d. $20,400

Moises company sells ground veal internally to Patrick company, which

in turn, produces veal burgers that sell for $10 per pound. Moises
company incurs costs of $1.25 per pound while Patrick company incurs
additional costs of $5.00 per pound
1. What is Moises company operating income per burger, assuming the
transfer price of the ground veal is set at $2.00 per burger?
a. $0.75
b. $1.50
c. $2.25
d. $3.00
2. Which of the following formulas correctly reflects the company’s
operating income per pound?
a. $10.00- ($1.25+$5.00)=$3.75
b. $10.00- ($2.50+$5.00)=$2.50
c. $10.00- ($1.25+$7.50)=$1.75
d. $10.00- ($0.50+$2.50+$5.00)=$0
Nice One Company manufactures only one type of washing machine and has
two divisions, the compressor division and fabrication division. The
compressor division manufactures compressors for fabrication division,
which completes the washing machine and sells it to the retailers. The
compressor division “sells” shoes to the fabrication division. The
market price for fabrication division to purchase a compressor is
$40.00(ignore changes in inventory). The fixed costs for compressor
division are assumed to be the same over the range of 5,000-10,000
units. The fixed costs of the fabrication division are assumed to be
$7.50 per unit at 10,000 units.
Compressor’s cost per compressor are:
Direct materials $15
Direct labor $7.25
 Variable overhead $3
Division fixed cost $7.50
Fabrication’s cost per completed washing machine are:
Direct materials $150
Direct labor $62.50
Variable overhead $20
Division fixed cost $7.50
1. What is the market-based transfer price per pair of shoe from
compressor division to fabrication division?
a. $17.00
b. $27.25
c. $34.75
d. $40.00
2. What is the transfer price per compressor from the Compressor
division to Fabrication division if the method used to place a
value on each compressor is 150% of variable costs?
a. $22.50
b. $37.88
c. $45.00
d. $50.50