TRANSFER PRICING

1. The amounts charged for goods and services exchanged between two divisions are known as:
a. target prices.
b. transfer prices.
c. standard variable costs.
d. residual prices.
2. 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
3. A transfer pricing system is also known as
a. investment center accounting.
b. a revenue allocation system.
c. responsibility accounting.
d. a charge-back system.
4. The maximum of the transfer price negotiation range is
a. determined by the buying division.
b. set by the selling division.
c. influenced only by internal cost factors.
d. negotiated by the buying and selling division.
5. To avoid waste and maximize efficiency when transferring products among divisions in a competitive
economy, a large diversified corporation should base transfer prices on
a. variable cost.
b. market price.
c. full cost.
d. production cost.
6. An internal reconciliation account is not required for internal transfers based on
a. market value.
b. dual prices.
c. negotiated prices.
d. cost.
7. Top management can preserve the autonomy of division managers and encourage an optimal level of
internal transactions by
a. selecting performance evaluation measures that are consistent with the achievement of overall
corporate goals.
b. selecting division managers who are most concerned about their individual performance.
c. prescribing transfer prices between segments.
d. setting up all organizational units as revenue centers.
8. Suddath Corporation has no excess capacity. If the firm desires to implement the general transfer-pricing
rule, opportunity cost would be equal to:
a. zero.
b. the direct expenses incurred in producing the goods.
c. the total difference in the cost of production between two divisions.
d. the contribution margin forgone from the lost external sale.
9. 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.
10. Suddath Corporation has no excess capacity. If the firm desires to implement the general transfer-pricing
rule, opportunity cost would be equal to:
a. zero.
b. the direct expenses incurred in producing the goods.
c. the total difference in the cost of production between two divisions.
d. the contribution margin forgone from the lost external sale.
11. The biggest challenge in making a decentralized organization function effectively is:
A. earning maximum profits through fair practices.
B. minimizing losses.
C. taking advantage of the specialized knowledge and skills of highly talented managers.
D. obtaining goal congruence among division managers.
E. developing an adequate budgetary control system.
12. Which of the following describes the goal that should be pursued when setting transfer prices?
A. Maximize profits of the buying division.
B. Maximize profits of the selling division.
C. Allow top management to become actively involved when calculating the proper dollar amounts.
 D. Establish incentives for autonomous division managers to make decisions that are in the overall
organization's best interests (i.e., goal congruence).
E. Minimize opportunity costs.
13. A general calculation method for transfer prices that achieves goal congruence begins with the additional
outlay cost per unit incurred because goods are transformed and then
A. adds the opportunity cost per unit to the organization because of the transfer.
B. subtracts the opportunity cost per unit to the organization because of the transfer.
C. adds the sunk cost per unit to the organization because of the transfer.
D. subtracts the sunk cost per unit to the organization because of the transfer.
E. adds the sales revenue per unit to the organization because of the transfer.
14. Computer Solutions Corporation manufactures and sells various high-tech office automation products. Two
divisions of Office Products Inc. are the Computer Chip Division and the Computer Division. The Computer Chip
Division manufactures one product, a "super chip," that can be used by both the Computer Division and other
external customers. The following information is available on this month's operations in the Computer Chip
Division:

Selling price per chip P50

Variable costs per chip P20
Fixed production costs P60,000
Fixed SG&A costs P90,000
Monthly capacity 10,000 chips
External sales 6,000 chips
Internal sales 0 chips

Presently, the Computer Division purchases no chips from the Computer Chips Division, but instead pays
P45 to an external supplier for the 4,000 chips it needs each month.

Refer to Computer Solutions Corporation. Assume that next month's costs and levels of operations in the
Computer and Computer Chip Divisions are similar to this month. What is the transfer price range for a possible
transfer of the super chip from one division to the other?

15. The Motor Division of Dynamic Engine Corporation uses 5,000 carburetors per month in its production of
automotive engines. It presently buys all of the carburetors it needs from two outside suppliers at an average cost of
P100. The Carburetor Division of Dynamic Engine Corporation manufactures the exact type of carburetor that the
Motor Division requires. The Carburetor Division is presently operating at its capacity of 15,000 units per month
and sells all of its output to a foreign car manufacturer at P106 per unit. Its cost structure (on 15,000 units) is:

Variable production costs P70

Variable selling costs 10
All fixed costs 10
Assume that the Carburetor Division would not incur any variable selling costs on units that are transferred
internally.
Refer to Dynamic Engine Corporation. If the two divisions agree to transact with one another, corporate
profits will rise or drop by how much?

16. Watts Corporation produces various products used in the construction industry. The Plumbing Division
produces and sells 100,000 copper fittings each month. Relevant information for last month follows:

Total sales (all external) P250,000

Expenses (all on a unit base):
Variable manufacturing P0.50
Fixed manufacturing .25
Variable selling .30
Fixed selling .40
Variable G&A .15
Fixed G&A .50
Total P2.10

Top-level managers are trying to determine how a transfer price can be set on a transfer of 10,000 of the
copper fittings from the Plumbing Division to the Bathroom Products Division.
Refer to Watts Corporation. A transfer price based on full production cost would be set at ___________ per
unit.

17. Cost-based transfer prices are helpful

a. when a market exists for the product.
b. when a price is easy to obtain.
c. when the product is unique.
d. for all of the above.
18. AutoTech's Northern Division is currently purchasing a part from an outside supplier. The company's
Southern Division, which has no excess capacity, makes and sells this part for external customers at a variable cost
of P19 and a selling price of P31. If Southern begins sales to Northern, it (1) will use the general transfer-pricing
rule and (2) will be able to reduce variable cost on internal transfers by P3. On the basis of this information,
Southern would establish a transfer price of:

All of the following are listed as transfer pricing methods except:

a. fixed cost. d. negotiated price.
b. variable cost. e. full cost.
c. market price.
19. The most fundamental responsibility center affected by the use of market-based transfer prices is a(n)
a. Production center
b. Investment center
c. Cost center
d. Profit center
20. In theory, the optimal method for establishing a transfer price is
a. Flexible budget cost
b. Incremental cost
c. Budgeted cost with or without a mark up
d. Market price
21. A transfer pricing system should satisfy which of the following objectives?
a. accurate performance evaluation
b. goal congruence
c. preservation of divisional autonomy
d. all of the above
22. The opportunity cost approach to setting a transfer price would set the minimum transfer price as
a. the opportunity cost of the firm as a whole
b. the opportunity cost of the selling division
c. the opportunity cost of the buying division
d. none of the above
23. A selling division produces components for a buying division that is considering accepting a special order for the products if pr
The selling division has excess capacity. The minimum price the selling division would be willing to accept is
a. the selling division's variable costs
b. the buying division's outside purchase price
c. the price that would allow the buying division to cover its incremental cost of the special order
d. the price that would allow the selling division to maintain its current ROI.
24. A benefit of using a market based price for a product transferred between divisions 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 are correct.
25. Which of the following methods is popular because they are easy to enforce?
a. market-based transfer prices c. negotiated transfer prices
b. cost-based transfer prices d. administered transfer prices
26. Las and Vegas are the only two divisions in the Ace Company. Las makes and sells wheels which can either be
sold to outside customers or sold to Vegas. The ff. Data are available from last month:

Las:
Selling price per wheel to outside customers P45
Variable costs per wheel when sold to
outside customers P30
Capacity in wheels 12,000
Wheels sold to outside customers 6,000
Vegas:
Number of wheels needed per month 4,000
Price per wheel pain to an outside supplier P42
If Las sells wheels to Vegas, Las can avoid P2 per wheel in sales commissions.
Suppose that Las sells 9,000 wheels each month to outside consumers. If the transfer pricing formula is used to find
the transfer price, what is the appropriate price per wheel?
a. P29.50 c. P39.25
b. P31.75 d. P42.00

Use the following information below to answer questions 27 through 31:

Calculate the Division operating income for the Steps Company – which manufactures only on type of shoe and has
two divisions – the Parts Division and the Production Division. The Parts Division manufactures soles for the
Production Division, which completes the shoe and sell it to retailers. The Parts Division “sells” soles to the
Production Division. The market price for the Production Division to purchase a pair of soles is P20. (Ignore
changes in inventory). The fixed costs for the Parts Division are assumed to be the same over the range: 40,000 –
100,000 units. The fixed costs for the Production Division are assumed to be P7 per pair at 100,000 units.

Part’s costs per pair of soles are:

Direct materials P4
Direct labor P3
Variable overhead P2
Division fixed costs P1

Production’s cost per completed pair of shoes are:

Direct materials P6
Direct labor P2
Variable overhead P1
Division fixed costs P7

27. What is the transfer price per pair of soles from the Parts Division to the Production if the method used to place a
value on each pair of soles is 180% of variable costs?
a. P9 c. P16.20
b. P10 d. P18

28. What is the transfer price per pair of soles from the Parts Division to the Production Division per pair of soles if
the transfer price per pair of soles is 125% of full costs?
a. P10 c. P13
b. P12.50 d. P15

29. Calculate the difference in overall corporate net income if the Production Division sells 100,000 pairs of shoes at
a price per pair of shoes of P60 under Scenario A and Scenario B:
Scenario A – transfer price – negotiated P15 per pair of soles
Scenario B – transfer price is market price.
a. P500,000 more under Scenario A
b. P500,000 – under Scenario B
c. P100,000 under Scenario A
d. None of the above

30. If the transfer price for a pair of soles is 180% of total costs of the Parts department, and 40,000 of soles are
produced and transferred to the Production department, the Parts Division’s operating income is:
a. P320,000 c. P400,000
b. P360,000 d. P440,000

31. If the Assembly division sells 100,000 pairs of shoes at a price of P60 a pair, what is the net income of both
divisions together?
a. P4,400,000
b. P3,400,000
c. P3,000,000
d. P2,600,000