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Questions and Answers
The price that one division of a company charges another division for goods or services provided is called the:
The price that one division of a company charges another division for goods or services provided is called the:
- Market price
- Transfer price (correct)
- Outlay price
- Distress price
From the standpoint of the company, the important question in transfer pricing is:
From the standpoint of the company, the important question in transfer pricing is:
- What is fair to the divisions
- When the transfer should be made
- How to determine the profit of the divisions
- Whether or not the transfer should take place (correct)
As a general rule, the best transfer price to use to transfer the costs of a service center to an operating department is:
As a general rule, the best transfer price to use to transfer the costs of a service center to an operating department is:
- One that is based on budgeted total cost
- The price charged by an outside company for the same service (correct)
- The price that encourages goal congruence
- One that is based on budgeted variable cost
Which of the following is a consistently desirable characteristic in a transfer pricing system?
Which of the following is a consistently desirable characteristic in a transfer pricing system?
In a decentralized company in which divisions may buy goods from one another, the transfer pricing system should be designed primarily to:
In a decentralized company in which divisions may buy goods from one another, the transfer pricing system should be designed primarily to:
Market-based transfer prices are best for:
Market-based transfer prices are best for:
Given a competitive outside market for identical intermediate goods, what is the best transfer price, assuming all relevant information is readily available?
Given a competitive outside market for identical intermediate goods, what is the best transfer price, assuming all relevant information is readily available?
The transfer pricing method that allows managers the greatest degree of authority and control over the profit of their units is:
The transfer pricing method that allows managers the greatest degree of authority and control over the profit of their units is:
Which of the following is the most valid reason for not using a cost-plus transfer price between decentralized units of a company? A cost-plus transfer price:
Which of the following is the most valid reason for not using a cost-plus transfer price between decentralized units of a company? A cost-plus transfer price:
The most valid reason for using something other than a full-cost-based transfer price between units of a company is because a full-cost price:
The most valid reason for using something other than a full-cost-based transfer price between units of a company is because a full-cost price:
With two autonomous division managers, the price of goods transferred between the divisions needs to be approved by:
With two autonomous division managers, the price of goods transferred between the divisions needs to be approved by:
The minimum potential transfer price is determined by:
The minimum potential transfer price is determined by:
Which of the following is true about transfer prices for sales between divisions located in different countries?
Which of the following is true about transfer prices for sales between divisions located in different countries?
Division P of the Kenshemrock Company makes a part that can either be sold to outside customers or transferred internally to Division Q for further processing. Annual data relating to this part are as follows:
Annual production capacity.............................................. 80,000 units
Selling price of the item to outside customers.............................. P35
Variable cost per unit............................................................. P23
Fixed cost per unit.................................................................. P5
Division Q of the company requires 15,000 units per year and is currently paying an outside supplier P33 per unit.
If outside customers demand only 50,000 units per year, what is the lowest acceptable transfer price from the viewpoint of the selling division?
Division P of the Kenshemrock Company makes a part that can either be sold to outside customers or transferred internally to Division Q for further processing. Annual data relating to this part are as follows:
Annual production capacity.............................................. 80,000 units Selling price of the item to outside customers.............................. P35 Variable cost per unit............................................................. P23 Fixed cost per unit.................................................................. P5
Division Q of the company requires 15,000 units per year and is currently paying an outside supplier P33 per unit.
If outside customers demand only 50,000 units per year, what is the lowest acceptable transfer price from the viewpoint of the selling division?
Division P of the Kenshemrock Company makes a part that can either be sold to outside customers or transferred internally to Division Q for further processing. Annual data relating to this part are as follows:
Annual production capacity.............................................. 80,000 units
Selling price of the item to outside customers.............................. P35
Variable cost per unit............................................................. P23
Fixed cost per unit.................................................................. P5
Division Q of the company requires 15,000 units per year and is currently paying an outside supplier P33 per unit.
If outside customers demand 80,000 units, what is the lowest acceptable transfer price from the viewpoint of the selling division?
Division P of the Kenshemrock Company makes a part that can either be sold to outside customers or transferred internally to Division Q for further processing. Annual data relating to this part are as follows:
Annual production capacity.............................................. 80,000 units Selling price of the item to outside customers.............................. P35 Variable cost per unit............................................................. P23 Fixed cost per unit.................................................................. P5
Division Q of the company requires 15,000 units per year and is currently paying an outside supplier P33 per unit.
If outside customers demand 80,000 units, what is the lowest acceptable transfer price from the viewpoint of the selling division?
Division P of the Kenshemrock Company makes a part that can either be sold to outside customers or transferred internally to Division Q for further processing. Annual data relating to this part are as follows:
Annual production capacity.............................................. 80,000 units
Selling price of the item to outside customers.............................. P35
Variable cost per unit............................................................. P23
Fixed cost per unit.................................................................. P5
Division Q of the company requires 15,000 units per year and is currently paying an outside supplier P33 per unit.
If outside customers demand 80,000 units and if, by selling to Division Q, Division P could avoid P4 per unit in variable selling expense, what is the lowest acceptable transfer price from the viewpoint of the selling division?
Division P of the Kenshemrock Company makes a part that can either be sold to outside customers or transferred internally to Division Q for further processing. Annual data relating to this part are as follows:
Annual production capacity.............................................. 80,000 units Selling price of the item to outside customers.............................. P35 Variable cost per unit............................................................. P23 Fixed cost per unit.................................................................. P5
Division Q of the company requires 15,000 units per year and is currently paying an outside supplier P33 per unit.
If outside customers demand 80,000 units and if, by selling to Division Q, Division P could avoid P4 per unit in variable selling expense, what is the lowest acceptable transfer price from the viewpoint of the selling division?
Division P of the Kenshemrock Company makes a part that can either be sold to outside customers or transferred internally to Division Q for further processing. Annual data relating to this part are as follows:
Annual production capacity.............................................. 80,000 units
Selling price of the item to outside customers.............................. P35
Variable cost per unit............................................................. P23
Fixed cost per unit.................................................................. P5
Division Q of the company requires 15,000 units per year and is currently paying an outside supplier P33 per unit.
If outside customers demand 70,000 units, what is the lowest acceptable transfer price from the viewpoint of the selling division for each of the 15,000 units needed by Q?
Division P of the Kenshemrock Company makes a part that can either be sold to outside customers or transferred internally to Division Q for further processing. Annual data relating to this part are as follows:
Annual production capacity.............................................. 80,000 units Selling price of the item to outside customers.............................. P35 Variable cost per unit............................................................. P23 Fixed cost per unit.................................................................. P5
Division Q of the company requires 15,000 units per year and is currently paying an outside supplier P33 per unit.
If outside customers demand 70,000 units, what is the lowest acceptable transfer price from the viewpoint of the selling division for each of the 15,000 units needed by Q?
Division A makes a part that it sells to customers outside of the Jomer Company. Data concerning this part appear below:
Selling price to outside customers.............................................. P40
Variable cost per unit............................................................. P30
Total fixed costs.................................................................. P10,000
Capacity in units..................................................................... 20,000
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 P38 per unit and would substitute the part made by Division A. Division B requires 5,000 units of the part each period. Division A is already selling all of the units it can produce to outside customers. If Division A sells to Division B rather than to outside customers, the variable cost per unit would be P1 lower. What is the lowest acceptable transfer price from the standpoint of the selling division?
Division A makes a part that it sells to customers outside of the Jomer Company. Data concerning this part appear below:
Selling price to outside customers.............................................. P40 Variable cost per unit............................................................. P30 Total fixed costs.................................................................. P10,000 Capacity in units..................................................................... 20,000
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 P38 per unit and would substitute the part made by Division A. Division B requires 5,000 units of the part each period. Division A is already selling all of the units it can produce to outside customers. If Division A sells to Division B rather than to outside customers, the variable cost per unit would be P1 lower. What is the lowest acceptable transfer price from the standpoint of the selling division?
Angelika Company has two divisions: The C Division and the B Division. The B Division produces containers that can be used by the C Division. The B Division's variable manufacturing cost is P2, shipping cost is P0.10, and the external sales price is P3. No shipping costs are incurred on sales to the C Division, and the C Division can purchase similar containers in the external market for P2.60.
The B Division has sufficient capacity to meet all external market demands in addition to meeting the demands of the C Division. Using the general rule, the transfer price from the B Division to the C Division would be:
Angelika Company has two divisions: The C Division and the B Division. The B Division produces containers that can be used by the C Division. The B Division's variable manufacturing cost is P2, shipping cost is P0.10, and the external sales price is P3. No shipping costs are incurred on sales to the C Division, and the C Division can purchase similar containers in the external market for P2.60.
The B Division has sufficient capacity to meet all external market demands in addition to meeting the demands of the C Division. Using the general rule, the transfer price from the B Division to the C Division would be:
Angelika Company has two divisions: The C Division and the B Division. The B Division produces containers that can be used by the C Division. The B Division's variable manufacturing cost is P2, shipping cost is P0.10, and the external sales price is P3. No shipping costs are incurred on sales to the C Division, and the C Division can purchase similar containers in the external market for P2.60
Assume the B Division has no excess capacity and could sell everything it produced externally. Using the general rule, the transfer price from the B Division to the C Division would be:
Angelika Company has two divisions: The C Division and the B Division. The B Division produces containers that can be used by the C Division. The B Division's variable manufacturing cost is P2, shipping cost is P0.10, and the external sales price is P3. No shipping costs are incurred on sales to the C Division, and the C Division can purchase similar containers in the external market for P2.60
Assume the B Division has no excess capacity and could sell everything it produced externally. Using the general rule, the transfer price from the B Division to the C Division would be:
Angelika Company has two divisions: The C Division and the B Division. The B Division produces containers that can be used by the C Division. The B Division's variable manufacturing cost is P2, shipping cost is P0.10, and the external sales price is P3. No shipping costs are incurred on sales to the C Division, and the C Division can purchase similar containers in the external market for P2.60.
The maximum amount the C Division would be willing to pay for each bottle transferred would be:
Angelika Company has two divisions: The C Division and the B Division. The B Division produces containers that can be used by the C Division. The B Division's variable manufacturing cost is P2, shipping cost is P0.10, and the external sales price is P3. No shipping costs are incurred on sales to the C Division, and the C Division can purchase similar containers in the external market for P2.60.
The maximum amount the C Division would be willing to pay for each bottle transferred would be:
Ella Corporation manufactures and sells various high-tech office automation products. Two divisions of the company are the C Division and the D Division. The C Division manufactures one product, a "super chip," that can be used by both the D Division and other external customers. The following information is available on this month's operations in the C 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 D Division purchases no chips from the C Division, but instead pays P45 to an external supplier for the 4,000 chips it needs each month.
Assume that next month's costs and levels of operations in the C and D Divisions are similar to this month. What is the minimum of the transfer price range for a possible transfer of the super chip from one division to the other?
Ella Corporation manufactures and sells various high-tech office automation products. Two divisions of the company are the C Division and the D Division. The C Division manufactures one product, a "super chip," that can be used by both the D Division and other external customers. The following information is available on this month's operations in the C 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 D Division purchases no chips from the C Division, but instead pays P45 to an external supplier for the 4,000 chips it needs each month.
Assume that next month's costs and levels of operations in the C and D Divisions are similar to this month. What is the minimum of the transfer price range for a possible transfer of the super chip from one division to the other?
Ella Corporation manufactures and sells various high-tech office automation products. Two divisions of the company are the C Division and the D Division. The C Division manufactures one product, a "super chip," that can be used by both the D Division and other external customers. The following information is available on this month's operations in the C 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 D Division purchases no chips from the C Division, but instead pays P45 to an external supplier for the 4,000 chips it needs each month.
Assume that next month's costs and levels of operations in the D and C Divisions are similar to this month. What is the maximum of the transfer price range for a possible transfer of the chip from one division to the other?
Ella Corporation manufactures and sells various high-tech office automation products. Two divisions of the company are the C Division and the D Division. The C Division manufactures one product, a "super chip," that can be used by both the D Division and other external customers. The following information is available on this month's operations in the C 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 D Division purchases no chips from the C Division, but instead pays P45 to an external supplier for the 4,000 chips it needs each month.
Assume that next month's costs and levels of operations in the D and C Divisions are similar to this month. What is the maximum of the transfer price range for a possible transfer of the chip from one division to the other?
Ella Corporation manufactures and sells various high-tech office automation products. Two divisions of the company are the C Division and the D Division. The C Division manufactures one product, a "super chip," that can be used by both the D Division and other external customers. The following information is available on this month's operations in the C 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 D Division purchases no chips from the C Division, but instead pays P45 to an external supplier for the 4,000 chips it needs each month.
Two possible transfer prices (for 4,000 units) are under consideration by the two divisions: P35 and P40. Corporate profits would be _____ if P35 is selected as the transfer price rather than P40.
Ella Corporation manufactures and sells various high-tech office automation products. Two divisions of the company are the C Division and the D Division. The C Division manufactures one product, a "super chip," that can be used by both the D Division and other external customers. The following information is available on this month's operations in the C 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 D Division purchases no chips from the C Division, but instead pays P45 to an external supplier for the 4,000 chips it needs each month.
Two possible transfer prices (for 4,000 units) are under consideration by the two divisions: P35 and P40. Corporate profits would be _____ if P35 is selected as the transfer price rather than P40.
Ella Corporation manufactures and sells various high-tech office automation products. Two divisions of the company are the C Division and the D Division. The C Division manufactures one product, a "super chip," that can be used by both the D Division and other external customers. The following information is available on this month's operations in the C 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 D Division purchases no chips from the C Division, but instead pays P45 to an external supplier for the 4,000 chips it needs each month.
If a transfer between the two divisions is arranged next period at a price (on 4,000 units of super chips) of P40, total profits in the C division will:
Ella Corporation manufactures and sells various high-tech office automation products. Two divisions of the company are the C Division and the D Division. The C Division manufactures one product, a "super chip," that can be used by both the D Division and other external customers. The following information is available on this month's operations in the C 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 D Division purchases no chips from the C Division, but instead pays P45 to an external supplier for the 4,000 chips it needs each month.
If a transfer between the two divisions is arranged next period at a price (on 4,000 units of super chips) of P40, total profits in the C division will:
Ella Corporation manufactures and sells various high-tech office automation products. Two divisions of the company are the C Division and the D Division. The C Division manufactures one product, a "super chip," that can be used by both the D Division and other external customers. The following information is available on this month's operations in the C 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 D Division purchases no chips from the C Division, but instead pays P45 to an external supplier for the 4,000 chips it needs each month.
Assume, for this question only, that the C Division is selling all that it can produce to external buyers for P50 per unit. How would overall corporate profits be affected if it sells 4,000 units to the D Division at P45? (Assume that the D Division can purchase the super chip from an outside supplier for P45.)
Ella Corporation manufactures and sells various high-tech office automation products. Two divisions of the company are the C Division and the D Division. The C Division manufactures one product, a "super chip," that can be used by both the D Division and other external customers. The following information is available on this month's operations in the C 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 D Division purchases no chips from the C Division, but instead pays P45 to an external supplier for the 4,000 chips it needs each month.
Assume, for this question only, that the C Division is selling all that it can produce to external buyers for P50 per unit. How would overall corporate profits be affected if it sells 4,000 units to the D Division at P45? (Assume that the D Division can purchase the super chip from an outside supplier for P45.)
Flashcards
Transfer Price
Transfer Price
The price one division of a company charges another division for goods or services.
Goal Congruence
Goal Congruence
When transfer prices encourage each division of a company to act in the best interest of the whole company.
Market-Based Transfer Price
Market-Based Transfer Price
A transfer price that reflects the price of similar goods or services in the external market.
Selling Division Operating at Capacity
Selling Division Operating at Capacity
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Minimum Potential Transfer Price
Minimum Potential Transfer Price
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Cost-Plus Transfer Price
Cost-Plus Transfer Price
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Negotiated Transfer Price
Negotiated Transfer Price
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Decentralized Company
Decentralized Company
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Transfer Pricing System
Transfer Pricing System
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Market Price
Market Price
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Transfer Pricing System Design
Transfer Pricing System Design
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Best Transfer Pricing Method
Best Transfer Pricing Method
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Full Cost Transfer Price
Full Cost Transfer Price
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Idle Capacity
Idle Capacity
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Impact of Transfer Price
Impact of Transfer Price
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Subunit Performance Measurement
Subunit Performance Measurement
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Tax Structures
Tax Structures
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Study Notes
Transfer Pricing
- Transfer price is the price one division of a company charges another division for goods or services.
- From the company's perspective, the key question in transfer pricing is determining a fair price for the divisions.
- The best transfer price for a service center to an operating department is the price charged by an outside company for the same service.
- An ideal transfer pricing system supports goal congruence and facilitates accurate subunit performance evaluation.
Characteristics of a Desirable Transfer Pricing System
- A desirable transfer pricing system is not overly complex to ensure fairness to both buying and selling units.
- Performance measures should be easily determined.
- The system should reflect organizational goals.
- Transfer prices should not fluctuate frequently.
Transfer Pricing in Decentralized Companies
- In decentralized companies, transfer pricing should support divisional autonomy and managerial performance appraisal.
- It should motivate managers and aid in the evaluation of managerial performance.
- Avoiding external purchases, and encouraging internal transactions, should not be a primary goal of transfer pricing system design.
Market-Based Transfer Prices
- Market-based transfer prices are best when the selling division operates below capacity.
- When operating at capacity, external sales should take precedence over internal transfers.
Transfer Price for Intermediate Goods
- When there is a competitive, outside market for identical intermediate goods, the best transfer price is the market price of the intermediate good.
- If the selling division's variable costs are lower than the external market price for the goods, the transfer price is the variable cost plus any additional relevant costs.
- Transfer pricing should not include any allocated profit from the sales division.
Transfer Pricing Methods
- Allow managers the greatest degree of authority and control over the profit of their units.
- Costs plus a margin
- Variable Costs
- Negotiated Price
- Market price
Minimum Potential Transfer Prices
- The minimum potential transfer price is determined by the incremental costs in the selling division.
- The lowest outside price for the good; or
- The extent of idle capacity in the buying division.
Transfer Pricing and International Sales
- Transfer pricing for international sales needs to consider differing tax structures in the two countries.
- Transfer pricing can impact the overall income of a company.
Transfer Pricing Example (Division P and Division Q)
- Division P has a capacity of 80,000 units and a selling price of P35 per unit.
- Variable costs are P23 per unit and fixed costs are P5 per unit.
- Division Q needs 15,000 units.
- The lowest acceptable transfer price from the viewpoint of the selling division is P28
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Description
Explore the fundamentals of transfer pricing in corporate settings, including the determination of fair prices between divisions. This quiz also covers the characteristics of an effective transfer pricing system and its implications for decentralized companies.
