TRANSFER PRICING D.

when the transfer should be made

THEORIES: Objectives
Nature 1. The objective of a transfer pricing system should be to
5. Transfer prices are charges for A. maximize the transfer price
A. transportation of goods outside units of an organization. B. minimize the transfer price
B. goods sold by subunits to outside customers. C. maintain goal congruence between the divisions and the entire firm
C. goods exchanged among subunits. D. none of the above
D. goods stored within a subunit.
2. The objective(s) of transfer pricing are
23. A transfer price is a price charged A. to motivate managers
A. to outside customers B. to provide an incentive for managers to make decisions consistent with the
B. when one division sells its goods or services to another division firm's goals (i.e., goal congruence)
C. by the selling division to the buying division when outside market does not C. to provide a basis for fairly rewarding the managers
exist D. all of the above
D. a and b
4. A transfer pricing system should satisfy which of the following objectives?
24. Transfer prices are A. accurate performance evaluation C. goal congruence
A. necessary to calculate costs in a cost, profit, or investment center B. preservation of divisional autonomyD. all of the above
B. preferred by buying divisions are the lowest possible
C. do not make any difference for the company's bottom-line no matter what 34. The market price method satisfy a key objective of transfer pricing, namely:
number is used A. objectivity C. consistency
D. all of the above B. usability D. reliability

36. Which of the following is a key factor to consider in deciding whether to make Irrelevant costs
internal transfers, and, if so, in setting the transfer price? 29. Which item is usually not relevant to a decision by a divisional manager to
A. Is there an outside supplier? reduce a transfer price to meet a price offered to another division by an outside
B. Is the seller's variable cost less than the market price/ supplier?
C. Is the selling unit operating at full capacity? A. opportunity cost
D. All of the above are key factors. B. variable manufacturing costs
C. fixed divisional overhead
32. From the standpoint of the company, the important question in transfer pricing D. the price offered by the outside supplier
is
A. what is fair to the divisions Minimum & Maximum Transfer Price
B. how to determine the profit of the divisions General rule
C. whether or not the transfer should take place 9. The general rule in establishing transfer prices consistent with economic
 decision making is the
A. differential cost plus opportunity cost if goods are transferred Methods of transfer pricing
internally. 3. The basic methods used in transfer pricing are
B. actual cost plus opportunity cost if goods are transferred internally. A. variable or full costs C. market price or negotiated price
C. standard cost plus opportunity cost if goods are transferred internally. B. dual prices D. all of the above
D. all of the above.
8. An example of a transfer price policy is
Seller’s standpoint (minimum price) A. market price.
26. The minimum transfer price should be: B. actual cost plus markup.
A. opportunity cost for selling division C. standard cost plus markup.
B. opportunity cost for buying division D. all of the above.
C. opportunity cost for the company as a whole
D. only variable cost for the selling division 27. Transfer prices are set by:
A. cost or cost plus C. negotiation
14. A selling division produces components for a buying division that is B. market prices D. all of the above
considering accepting a special order for the products it produces. The selling
division has excess capacity. The minimum price the selling division would be 35. Which of the following are transfer pricing models?
willing to accept is the A. Variable cost method C. Market cost method
A. selling division’s variable costs B. Average price method D. All of the above
B. buying division’s outside purchase price
C. price that would allow the buying division to cover its incremental cost of Market price
the special order 10. If a firm operates at capacity, the transfer price should be the:
D. price that would allow the selling division to maintain its current ROI A. external market price. C. actual cost.
B. differential cost. D. standard cost.
25. The minimum transfer price from the seller's standpoint is
A. market price when excess capacity exists 12. To avoid waste and maximize efficiency when transferring products among
B. market price when excess capacity does not exist divisions in a competitive economy, a large diversified corporation should
C. incremental costs when excess capacity exists base transfer prices on:
D. b and c A. full cost C. replacement cost
B. variable cost D. market price
Buyer’s standpoint (maximum price)
7. Generally, the outside market price would be 13. If an intermediate market exists, the optimal transfer price is the:
A. a floor for internal transfer price. A. outlay cost for producing the goods.
B. a ceiling for internal transfer price. B. opportunity cost of not selling to the outside market.
C. both a and b C. market price.
D. none of the above. D. variable costs associated with producing the product.

16. If there is no excess capacity, the transfer price is often
A. market price
B. opportunity cost plus incremental cost
C. variable cost or variable cost plus profit
D. a or b
20. Market pricing approach in transfer pricing
A. helps to preserve unit autonomy
B. provides incentive for the selling unit to be competitive with outside
suppliers
C. may be the most practical approach when there is significant conflict
D. both a and b
28. The best transfer price is usually
A. actual cost plus a percentage markup
B. a reliable market price
C. budgeted full cost plus a percentage markup
D. budgeted variable cost plus a percentage markup
30. Market-based transfer prices are best for the
A. company when the selling division is operating below capacity.
B. company when the selling division is operating at capacity.
C. buying division if it is operating at capacity.
D. buying division.
33. Which transfer price is ideal for the company when the selling division is at
capacity?
A. Market price
B. Incremental cost
C. Budgeted full cost
D. Actual variable cost plus a percentage profit
Actual costs
6. Disadvantages of transfer prices based on actual cost include:
A. reducing the incentive of managers of supplying divisions to control their
costs.
B. passing on efficiencies or inefficiencies of supplying divisions to receiving
divisions.
C. both a and b.
D. none of the above.
15. Which of the following types of transfer prices do not encourage the selling
division to be efficient?
A. transfer prices based upon market prices
B. transfer prices based upon actual costs
C. transfer prices based upon standard costs
D. transfer prices based upon standard costs plus a markup for profit
31. The worst transfer-pricing method is to base the prices on
A. market prices C. budgeted variable costs
B. budgeted total costs D. actual total costs
Variable costing
21. Variable costing method of transfer pricing is
A. easy to implement
B. intuitive and easily understood
C. more logical when there is excess capacity
D. all of the above
22. A company may consider using variable costs in transfer pricing when there is
A. excess capacity because variable costs would stay the same
B. no excess capacity because variable costs would not stay the same
C. excess capacity because fixed costs would stay the same
D. no excess capacity because fixed costs would stay the same
Full cost
18. If full cost is used in transfer pricing, it is preferable to use
A. standard full cost because the buyer does not wish to be stuck with
unknowns
B. standard full cost because the seller does not wish to pass along the
variations in cost
 C. actual full cost because the buyer is well-advised to deal with the real rather B. 85,000 D. 95,000
than anticipated costs
D. actual full costs because the seller is well-advised to deal with the real rather With excess capacity
than anticipated costs Bargaining range
ii. An appropriate transfer price between two divisions of the Reno Corporation
Negotiated can be determined from the following data:
11. Negotiated transfer prices are appropriate when: Fabrication Division
A. there are cost savings to the selling division. Market price of subassembly P50
B. there is no external market price. Variable cost of subassembly P20
C. the internal market price reflects a bargain price. Excess capacity (in units) 1,000
D. all of the above. Assembling Division
Number of units needed 900
17. A negotiated transfer pricing system is set up where What is the natural bargaining range for the two divisions?
A. the two sides cannot agree on a price and the difference between the two A. Between P20 and P50 C. Between P50 and P70
sides is absorbed by the home office B. Any amount less than P50 D. P50 is the only acceptable price
B. a ready market price is not available and the two sides must come up
with an agreeable price Minimum transfer price
C. the buyer buys at variable cost and the seller only sells at full cost iii. Family Enterprises has two divisions: Davy and Johnny. Davy Division has a
D. the two sides agree to use a cost basis for transfer pricing capacity to produce 2,000 units and is expecting to sell 1,500 units. Johnny
Division wants to purchase 100 units of a product Davy produces. Davy sells
Multinational transfer pricing the product at a selling price of P100 per unit, the variable cost per unit is P25
19. To minimize taxes, some multinational companies set low transfer prices when and the fixed costs total P30,000. The minimum transfer price that Davy will
goods are shipped from accept is?
A. low tax countries to other low tax countries A. P100 C. P43.75
B. low tax countries to high tax countries B. P45 D. P25
C. high tax countries to low tax countries
D. c or b iv. Assume that Division X has a product that can be sold either to outside
customers on an intermediate market or to Division Y of the same company
PROBLEMS: for use in its production process. The managers of the division are evaluated
Residual income based on their divisional profits.
i. Marsh Company that had current operating assets of one million and net income Division X:
of P200,000 had an opportunity to invest in a project that requires an additional Capacity in units 200,000
investment of P250,000 and increased net income by P40,000. The company's Number of units being sold on the intermediate market 160,000
required rate of return is 12%. After the investment, the company's residual Selling price per unit on the intermediate market P75
income will amount to Variables costs per unit 60
A. 80,000 C. 90,000 Fixed costs per unit (based on capacity) 8
 fixed cost of producing this component is P4 per unit and the variable cost is
Division Y: P7 per unit. Division Z would like to purchase this component from Division
Number of units needed for production 40,000 X. What would be the price that Division X should charge Division Z?
Purchase price per unit now being paid to an outside supplier P74 A. P 7 C. P 11
The minimum transfer price to be charged by the Division X should be: B. P 13 D. P 9
A. P60 C. P68
B. P75 D. P74 viii. The Black Division of Pluma Company produces a high quality marker.
Unit production costs (based on capacity production of 100,000 units per year)
Effect on profit of make decision follow:
v. Bearing Division of Phantom Corp. sells 80,000 units of Part X to the outside Direct materials P 60
market. Part X sells for P10.00 and has a variable cost of P5.50 and a fixed cost Direct labor 25
per unit of P2.50. Bearing has a capacity to produce 100,000 units per period. Overhead (20% variable) 15
Motor Division currently purchases 10,000 units of Part X from Bearing for Other information
P10.00. Motor has been approached by an outside supplier willing to supply Sales price 120
the parts for P9.00. What is the effect on XYZ’s overall profit if Bearing refuses The Black Division is producing and selling at capacity.
the outside price and Motor decides to buy outside? What is the minimum selling price that the division would consider as a
A. no change “transfer price” to the Red Division on which no variable period costs would
B. P20,000 decrease in Phantom profits be incurred?
C. P35,000 decrease in Phantom profits A. P120 C. P 88
D. P10,000 increase in Phantom profits B. P 91 D. P117 (?)

vi. Bearing Division of XYZ Corp. sells 80,000 units of Part X to the outside ix. Harem Corporation consists of two divisions, Mining and Builders. The
market. Part X sells for P10.00 and has a variable cost of P5.50 and a fixed cost Mining makes black steel, a product that can be used in the product that the
per unit of P2.50. Bearing has a capacity to produce 100,000 units per period. Builders division makes. Both divisions are considered profit centers. The
Motor Division currently purchases 10,000 units of Part X from Bearing for following data are available concerning black steel and the two divisions:
P10.00. Motor has been approached by an outside supplier willing to supply Mining Builders
the parts for P9.00. What is the effect on XYZ’s overall profit if Bearing refuses Average units produced 150,000
the outside price and Motor decides to buy inside? Average units sold 150,000
A. no change C. P35,000 decrease in XYZ profits Variable mfg cost per unit P2
B. P20,000 decrease in XYZ profits D. P10,000 increase in XYZ profits Variable finishing cost per unit P5
Fixed divisional costs P75,000 P125,000
At capacity The Mining Division can sell all of its output outside the company for P4 per
Minimum transfer price unit. The Builders Division can buy the black steel from other firms for P4.
vii. Company Y is highly decentralized. Division X, which is operating at The Builders Division sells its product for P12.
capacity, produces a component that it currently sells in a perfectly What is the optimal transfer price in this case?
competitive market for P13 per unit. At the current level of production, the A. P2 per unit C. P7 per unit
 B. P4 per unit D. P9 per unit instrument manufactured by that division (one board per instrument). Compo
Division incurred P100 in additional cost per instrument and then sold the
x. Assume that Steel Division has a product that can be sold either to outside instrument for P300 each.
customers on an intermediate market or to Fabrication Division of the same
company for use in its production process. The managers of the division are Assume that Chips Division’s manufacturing capacity is 20,000 circuit
evaluated based on their divisional profits. boards. Next year Compo Division wants to purchase 5,000 circuits board
Steel Division: from Chips Division rather than 4,000. (Circuit boards of this type are not
Capacity in units 200,000 available from outside sources.)
Number of units being sold on the intermediate market 200,000
Selling price per unit on the intermediate market P90 Should Chips Division sell 1,000 additional circuit boards to Compo Division
Variables costs per unit (including P3 of avoidable selling expense) or continue to sell them outside customers?
70 A. No, because the overall profit will decrease by P35,000.
Fixed costs per unit (based on capacity) 13 B. Yes, because the overall profit will decrease by P35,000.
C. No, because there is no change in the overall profit.
Fabrication Division: D. Yes, because the overall profit will increase by P75,000.
Number of units needed for production 40,000
Purchase price per unit now being paid to an outside supplier P86 Maximum transfer price
The appropriate transfer price should be: xii. Chips Division manufacturers electronic circuit boards. The boards can be
A. P90 C. P70 sold either to Compo Division of the same company or to outside customers.
B. P87 D. P86 Last year, the following activity occurred in division A:
Selling price per circuit board P125
Partial excess capacity Production cost per circuit board 90
Decision Numbers of circuit boards:
xi. Chips Division manufacturers electronic circuit boards. The boards can be Produced during the year 20,000
sold either to Compo Division of the same company or to outside customers. Sold to outside customers 16,000
Last year, the following activity occurred in division A: Sold to Compo Division 4,000

Selling price per circuit board P125 Sales to Compo Division were at the same price as sales to outside customers.
Production cost per circuit board 90 The circuit boards purchased by Compo Division were used in an electronic
Numbers of circuit boards: instrument manufactured by that division (one board per instrument). Compo
Produced during the year 20,000 Division incurred P100 in additional cost per instrument and then sold the
Sold to outside customers 16,000 instrument for P300 each.
Sold to Compo Division 4,000
Assume that Chips Division’s manufacturing capacity is 20,000 circuit
Sales to Compo Division were at the same price as sales to outside customers. boards. Next year Compo Division wants to purchase 5,000 circuits board
The circuit boards purchased by Compo Division were used in an electronic from Chips Division rather than 4,000. (Circuit boards of this type are not
 available from outside sources.) was twice as many.

Chips Division proposed that a transfer for additional 1,000 units be produced xiii. Actual cost per unit amounts to
by requiring its workers to work overtime. Chips Division indicated that the A. P90 C. P115
transfer price may be unreasonably high because of the overtime premium. B. P92 D. P120

What is the maximum transfer that Compo Division will accept for the xiv. The transfer price based on actual variable costs plus 130% markup amounts
additional 1,000 units? to
A. P 90 C. P200 A. P90 C. P115
B. P125 D. P300 B. P92 D. P120

Use the following data to answer questions 11 through 13. xv. The transfer price based on budgeted full cost plus 30% markup amounts to
N & R Company transfers a product from division N to division R. Variable cost A. P117 C. P150
of this product is anticipated to be P40 a unit and total fixed costs amount to P8,000. B. P140 D. P156
A total of 100 units are anticipated to be produced. Actual cost, however, amounts
to P50 for variable costs. Fixed costs were same as budget. However, actual output

i. Answer: C vi. Answer: A

New Operating Profit (P200,000 + P40,000) P240,000 There is no change in the profit because the Motor Division did not buy from the outside supplier
Less Required Returns (P1,250,000 x 0.12) 150,000
New Residual Income P 90,000 vii. Answer: B
The division is operating at capacity (zero excess capacity). Any quantity of production to be
ii. Answer: D transferred to the Division Z must be at P13; Any price below P13, as transfer price, would
The Fabrication division has excess capacity, therefore the division can transfer the units at decrease its profit.
a minimum transfer price of P50
viii. Answer: D
iii. Answer: D Selling price (market price) P120
The minimum Davy would accept is the opportunity cost to make the product, which would be Less avoidable selling expense 15 x 20% 3
the variable cost of P25. Minimum transfer price P117

iv. Answer: A ix. Answer: B

The minimum transfer price is P60 because the Division X has excess capacity The optimal transfer price is P4 per unit, which represents the value of using the black steel
in the Builders Division because the black steel will cost P2 to manufacture and each unit
v. Answer: C used internally is a unit that cannot be sold to external buyers. If an intermediate market exists,
The profit of the company will decrease by P35,000 which is the difference between the variable the optimal transfer price is the market price.
(relevant) cost and the purchase price.
(P9.00 – P5.5) x 10,000 units = P35,000 x. Answer: B
 Maximum material cost (transfer price) P200
The division is operating at capacity, therefore, the minimum transfer price must be the At a transfer price of P200, Compo will not realize any profit on the additional 1,000 units
amount of selling price, less avoidable selling expense.
Selling price P90 xiii. Answer: A
Avoidable selling expense 3 The actual cost is the sum of unit variable cost plus fixed cost divided by actual units produced.
Net Price 87 50 + (8000 ÷ 200) = P90

xi. Answer: D xiv. Answer: C

Selling price charged by Compo Division P300 Variable cost P 50
Selling price charge by Chips Division 125 Markup (P50 x 1.3) 65
Additional selling price P175 Transfer price P115
Less additional processing cost by Compo 100
Additional profit per unit P 75 xv. Answer: D
Additional profit: 1,000 x P75 P75,000 Budgeted full cost P40 + (P8,000 ÷ 100) P120
Markup (P120 x 0.3) 36
xii. Answer: C Transfer price P156
Final selling price by Compo P300
Less additional processing cost 100