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 the 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 price 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.
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 the two responsibility centers.
(B) A transfer price is the value assigned to the transfer of goods or services between divisions
within the same organization.
22. Which of the following responsibility centers is affected by the use of market-based
transfer prices?
23. Transfer prices would
not
be used by:
24. Which of the following statements is (are) true?
(A) If a transfer has no effect on divisional profit, managers will be indifferent between making the
transfer or not.
(B) 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.
25. In general, if a potential transfer has no effect on divisional profits:
26. An intermediate market is
perfect
when:
27. When there is no intermediate market:
28. The general principle on setting transfer prices that are in the organization’s best interests
is:
29. The optimal transfer price when there are intermediate markets is:
30. Which of the following is not an appropriate use of transfer pricing?
31. An internal transfer between two divisions is in the best economic interest of the entire
organization when:
32. Top management intervention in settling transfer pricing disputes between two divisions
should be avoided unless
33. The transfer price that should be used by top management in evaluating whether a
division should buy within the company or from an outside supplier is:
34. If the selling division has excess capacity, the transfer price should be set at its:
35. Some managers prefer to use cost rather than market price in controlling transfers
between divisions. If cost is to be used, then it should be:
36. Cost-based transfer prices that include a normal markup to the costs act as a surrogate
for:
37. Given a competitive outside market for identical intermediate goods, what is the BEST
transfer price, assuming all relevant information is readily available?
38. Multinational firms often face conflicting pressures when developing transfer pricing
policies. Tax avoidance results when:
39. Which of the following transfer pricing methods must be used in segment reporting by the
oil and gas industry?