Fundamentals of Cost Accounting, 6e (Lanen)
Chapter 15 Transfer Pricing
1) A transfer price is the value assigned to the transfer of goods or services between divisions
within the same organization.
2) Transfer prices are not used to record the exchange between two cost centers within the same
organization.
3) Transfer prices cannot be used for decision making, product costing, or performance
evaluation.
4) From an organization’s viewpoint, transfer prices have no effect on total profits assuming the
transfer occurs between two responsibility centers.
5) If a transfer has no effect on divisional profit, risk-neutral managers will be indifferent
between making the transfer or not.
6) If an intermediate market exists but divisions are prohibited from buying or selling from the
outside, the intermediate market can be ignored in determining the optimal transfer price.
7) A perfect intermediate market exists if buyers can buy and sellers can sell outside of the
organization.
8) When a perfect intermediate market exists, the optimal transfer price is the intermediate
market price.
9) In general, the optimal transfer price for a division is the sum of its outlay costs and the
opportunity cost of not transferring its goods to another division.
10) The use of an optimal transfer price eliminates potential conflicts between an organization’s
interests and the divisional manager’s interest.
11) A market price-based transfer pricing policy allows the selling division to determine the
price for transfers between divisions within the same organization.
12) A selling division at capacity is indifferent between selling to outsiders and transferring
inside at the market price.
13) When actual costs are used as the basis for a transfer, inefficiencies of the selling division are
transferred to the buying division.
14) A transfer made at cost does not motivate the selling division to transfer its goods or services
internally.
15) In general, negotiated transfer prices fall in a range between the selling division’s differential
costs and the buying division’s market price.
16) In the United States, more companies use cost-based transfer prices than market-based
transfer prices.
17) In interstate transactions, transfers can reduce an organization’s tax liability when the selling
division is in a lower tax jurisdiction than the buying division.
18) Tax avoidance is unethical when inflated transfer prices are used in international transactions
to shift profits from a division in one country to a division in another country.
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19) An organization that has significant foreign operations must disclose how its transfer prices
are established between domestic and foreign divisions.
20) The GAAP financial reporting rules for segments require that all companies use transfer
prices based on market prices.
21) Which of the following statements is(are) false?
(A) From an organization’s viewpoint, transfer prices have no effect on total profits assuming the
transfer occurs between two responsibility centers.
(B) A transfer price is the value assigned to the transfer of goods or services between divisions
within the same organization.
A) Only A is false.
B) Only B is false.
C) Both of these are false.
D) Neither of these is false.
22) Which of the following responsibility centers is affected by the use of market-based transfer
prices?
A) Cost center.
B) Profit center.
C) Revenue center.
D) Production center.
23) Transfer prices are used for all of the following except:
A) decision making.
B) product costing.
C) performance evaluation.
D) generation of overall organization profit.
24) A division can sell externally for $60 per unit. Its variable manufacturing costs are $35 per
unit, and its variable marketing costs are $12 per unit. What is the opportunity cost of
transferring internally, assuming the division is operating at capacity?
A) $13.
B) $25.
C) $35.
D) $47.
25) A division can sell externally for $60 per unit. Its variable manufacturing costs are $35 per
unit, and its variable marketing costs are $12 per unit. What is the optimal transfer price for
transferring internally, assuming the division is operating at capacity?
A) $12.
B) $35.
C) $47.
D) $60.
26) Division A has variable manufacturing costs of $50 per unit and fixed costs of $10 per unit.
Assuming that Division A is operating at capacity, what is the opportunity cost of an internal
transfer when the market price is $75?
A) $20.
B) $25.
C) $50.
D) $60.
27) Division A has variable manufacturing costs of $50 per unit and fixed costs of $10 per unit.
Assuming that Division A is operating at capacity, what is the optimal transfer price of an
internal transfer when the market price is $75?
A) $20.
B) $25.
C) $50.
D) $75.
28) Division A has variable manufacturing costs of $50 per unit and fixed costs of $10 per unit.
Assuming that Division A is operating significantly below capacity, what is the optimal transfer
price of an internal transfer when the market price is $75?
A) $20.
B) $25.
C) $50.
D) $60.
29) Division B has variable manufacturing costs of $50 per unit and fixed costs of $10 per unit.
Assuming that Division B is operating significantly below capacity, what is the opportunity cost
of an internal transfer when the market price is $75?
A) $0.
B) $25.
C) $50.
D) $60.
30) Dockside Enterprises Incorporated operates two divisions: (1) a management division that
owns and manages bulk carriers on the Great Lakes and (2) a repair division that operates a dry
dock in Tampa, Florida. The repair division works on company ships and outside large-hull
ships. The repair division has an estimated variable cost of $37 per labor-hour, has a backlog of
work for outside ships, and charges $70.00 per hour for labor, which is standard for this type of
work. The management division complained that it could hire its own repair workers for $45.00
per hour, including leasing an adequate work area.
What is the minimum transfer price per hour that the repair division should obtain for its
services, assuming it is operating at capacity?
A) $33.00.
B) $37.00.
C) $45.00.
D) $70.00.
31) Dockside Enterprises Incorporated operates two divisions: (1) a management division that
owns and manages bulk carriers on the Great Lakes and (2) a repair division that operates a dry
dock in Tampa, Florida. The repair division works on company ships and outside large-hull
ships. The repair division has an estimated variable cost of $37 per labor-hour, has a backlog of
work for outside ships, and charges $70.00 per hour for labor, which is standard for this type of
work. The management division complained that it could hire its own repair workers for $45.00
per hour, including leasing an adequate work area.
What is the maximum transfer price per hour that the management division should pay?
A) $33.00.
B) $37.00.
C) $45.00.
D) $70.00.
32) Dockside Enterprises Incorporated operates two divisions: (1) a management division that
owns and manages bulk carriers on the Great Lakes and (2) a repair division that operates a dry
dock in Tampa, Florida. The repair division works on company ships and outside large-hull
ships. The repair division has an estimated variable cost of $37 per labor-hour, has a backlog of
work for outside ships, and charges $70.00 per hour for labor, which is standard for this type of
work. The management division complained that it could hire its own repair workers for $45.00
per hour, including leasing an adequate work area.
If the repair division had idle capacity, what is the minimum transfer price that the repair
division should obtain?
A) $33.00.
B) $37.00.
C) $45.00.
D) $70.00.
33) You have been provided with the following information for Division X of a decentralized
company:
Selling price
$
90
Variable cost per unit
66
Fixed cost per unit
20
Sales volume (units)
22,500
Capacity (units)
25,000
Division Y of the same company would like to purchase all of its units internally. Division Y
needs 6,000 units each period and currently pays $84 per unit to an outside firm. What is the
lowest price that Division X could accept from Division Y? (Assume that Division Y wants to
use a sole supplier and will not purchase less than 6,000 from a supplier.)
A) $90.
B) $84.
C) $80.
D) $66.
34) When the selling division in an internal transfer has unsatisfied demand from outside
customers for the product that is being transferred, the lowest acceptable transfer price for the
selling division is:
A) the variable cost of producing a unit of product.
B) the full absorption cost of producing a unit of product.
C) the market price charged to outside customers, less costs saved by transferring internally.
D) the amount that the purchasing division would have to pay an outside seller to acquire a
similar product for its use.
35) Division A makes a part that it sells to customers outside of the company. Data concerning
this part appear below:
Selling price to outside customers
$
75
Variable cost per unit
$
50
Total fixed costs
$
400,000
Capacity in (units)
25,000
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 $70
per unit and would substitute the part made by Division A. Division B requires 5,000 units of the
part each period. Division A can already sell all of the units it can produce on the outside market.
What should be the lowest acceptable transfer price from the perspective of Division A?
A) $75.
B) $66.
C) $16.
D) $50.
36) Part 43X costs the Southern Division of Norris Corporation $26 to produce. Making up that
cost are direct materials of $10, direct labor of $4, variable manufacturing overhead of $9, and
fixed manufacturing overhead of $3. Southern Division sells Part 43X to other companies for
$30. The Northern Division of Norris Corporation can use Part 43X in one of its products. The
Southern Division has enough idle capacity to produce all of the units of Part 43X that the
Northern Division would require. What is the lowest transfer price at which the Southern
Division should be willing to sell Part 43X to the Northern Division?
A) $30.
B) $26.
C) $23.
D) $27.
37) The Wheel Division of Frankov Corporation has the capacity for making 75,000 wheel sets
per year and regularly sells 60,000 each year on the outside market. The regular sales price is
$100 per wheel set, and the variable production cost per unit is $65. The Retail Division of
Frankov Corporation currently buys 30,000 wheel sets (of the kind made by the Wheel Division)
yearly from an outside supplier at a price of $90 per wheel set. If the Retail Division were to buy
the 30,000 wheel sets it needs annually from the Wheel Division at a transfer price of $87 per
wheel set, the change in annual net operating income for the company as a whole would be:
A) $600,000.
B) $225,000.
C) $750,000.
D) $135,000.
38) Division X makes a part that it sells to customers outside of the company. Data concerning
this part appear below:
Selling price to outside customers
$
50
Variable cost per unit
$
30
Total fixed costs
$
400,000
Capacity in units
25,000
Division Y of the same company would like to use the part manufactured by Division X in one
of its products. Division Y currently purchases a similar part made by an outside company for
$49 per unit and would substitute the part made by Division X. Division Y requires 5,000 units
of the part each period. Division X has ample excess capacity to handle all of Division Y’s needs
without any increase in fixed costs and without impacting outside sales. What is the lowest
acceptable transfer price from the standpoint of the selling division?
A) $50.
B) $49.
C) $46.
D) $30.