64) Lock Division of Morgantown Corporation sells 80,000 units of part Z-25 to the outside
market. Part Z-25 sells for $40, has a variable cost of $22, and a fixed cost per unit of $10. The
Lock Division has a capacity to produce 100,000 units per period. The Cabinet Division
currently purchases 10,000 units of part Z-25 from the Lock Division for $40. The Cabinet
Division has been approached by an outside supplier willing to supply the parts for $36. What is
the effect on Morgantown’s overall profit if the Lock Division refuses to sell at the outside
supplier’s price and the Cabinet Division decides to buy outside?
A) No change in Morgantown’s profits.
B) $140,000 decrease in Morgantown’s profits.
C) $80,000 decrease in Morgantown’s profits.
D) $40,000 increase in Morgantown’s profits.
65) The Lock Division of Morgantown Corporation sells 80,000 units of part Z-25 to the outside
market. Part Z-25 sells for $40, has a variable cost of $22, and a fixed cost per unit of $10. The
Lock Division has a capacity to produce 100,000 units per period. The Cabinet Division
currently purchases 10,000 units of part Z-25 from the Lock Division for $40. The Cabinet
Division has been approached by an outside supplier willing to supply the parts for $36. What is
the effect on Morgantown’s overall profit if the Lock Division agrees to sell to the Cabinet
Division at the outside supplier’s price and the Cabinet Division continues to buy inside?
A) No change in Morgantown’s profits.
B) $140,000 decrease in Morgantown’s profits.
C) $80,000 decrease in Morgantown’s profits.
D) $40,000 increase in Morgantown’s profits.
66) Concrete Corporation has two producing centers, Contractor and Retailer. The Contractor
Division has a variable cost of $12 for its products and a total fixed cost of $120,000. The
Contractor Division also has idle capacity for up to 50,000 units per month. The Retailer
Division would like to purchase 20,000 units of the Contractor Division’s products per month but
is unable to convince the Contractor Division to transfer units to the Retailer Division at $16 per
unit. The Contractor Division has consistently argued that the market price of $20 is
nonnegotiable. What is The Contractor Division’s opportunity cost of not transferring units to
the Retailer Division?
A) $20.
B) $12.
C) $8.
D) $4.
67) You have been provided with the following information for the Wool Division of a
decentralized company:
Selling price
$
45
Variable cost per unit
$
33
Fixed cost per unit
$
12
Sales volume (units)
22,500
Capacity (units)
25,000
The Blanket Division would like to purchase all of its units internally. The Blanket Division
needs 6,000 units each period and currently pays $42 per unit to an outside firm. Assuming that
the Blanket Division wants to use a sole supplier and will not purchase less than 6,000 from a
supplier, what is the lowest price that Wool Division should accept from the Blanket Division?
A) $45.
B) $42.
C) $40.
D) $38.
68) Given the following data for Keyboard Division:
Selling price to outside customers
$
25
Variable cost per unit
$
12
Total fixed cost
$
50,000
Capacity (in units)
125,000
The Computer Division would like to purchase 15,000 units each period from the Keyboard
Division. The Keyboard Division has ample excess capacity to handle all of the Computer
Division’s needs. The Computer Division now purchases from an outside supplier at a price of
$20. If the Keyboard Division refuses to accept an $18 price internally, the company, as a whole,
will be worse off by:
A) $30,000.
B) $75,000.
C) $90,000.
D) $120,000.
69) Given the following data for Electrical Cord Division:
Selling price to outside customers
$
40
Variable cost per unit
30
Total fixed cost
10,000
Capacity (in units)
2,000
Assume that the Electrical Cord Division is selling all it can produce to outside customers. If it
sells to the Appliance Division, $1 can be avoided in variable cost per unit. The Appliance
Division is presently purchasing from an outside supplier at $38 per unit. From the point of view
of the company as a whole, any sales to the Appliance Division should be priced at:
A) $40.
B) $39.
C) $38.
D) The company would not want the transfer to take place.
70) Given the following data for Handle Division:
$
150
80
30
50,000
The Cabinet Division would like to purchase 10,000 units from the Handle Division at a price of
$125 per unit. Handle Division has no excess capacity to handle the Cabinet Division’s
requirements. The Cabinet Division currently purchases from an outside supplier at a price of
$140. If the Handle Division accepts a $125 price internally, the company, as a whole, will be
better or worse off by:
A) $600,000
B) $(100,000)
C) $115,000
D) $250,000
71) Altoona Corporation has two divisions, Hinges and Doors, which are both organized as profit
centers. The Hinge Division produces and sells hinges to the Door Division and to outside
customers. The Hinge Division has total costs per unit of $35, $20 of which are variable. The
Hinge Division is operating significantly below capacity and sells the hinges for $50.
The Door Division has received an offer from an outsider vendor to supply all the hinges it needs
(20,000 hinges) at a cost of $45. The manager of the Door Division is considering the offer but
wants to approach the Hinge Division first.
What would be the profit impact to Altoona Corporation as a whole if the Door Division
purchased the 20,000 hinges it needs from the outside vendor for $45?
A) No change in profit to Altoona.
B) $100,000 increase in profits.
C) $100,000 decrease in profits.
D) $500,000 decrease in profits.
72) Altoona Corporation has two divisions, Hinges and Doors, which are both organized as profit
centers. The Hinge Division produces and sells hinges to the Door Division and to outside
customers. The Hinge Division has total costs of $35, $20 of which are variable. The Hinge
Division is operating significantly below capacity and sells the hinges for $50.
The Door Division has received an offer from an outsider vendor to supply all the hinges it needs
(20,000 hinges) at a cost of $45. The manager of the Door Division is considering the offer but
wants to approach the Hinge Division first.
What is the minimum transfer price from the Hinge Division to the Door Division?
A) $20.
B) $35.
C) $45.
D) $50.
73) Altoona Corporation has two divisions, Hinges and Doors, which are both organized as profit
centers. The Hinge Division produces and sells hinges to the Door Division and to outside
customers. The Hinge Division has total costs of $35, $20 of which are variable. The Hinge
Division is operating significantly below capacity and sells the hinges for $50.
The Door Division has received an offer from an outsider vendor to supply all the hinges it needs
(20,000 hinges) at a cost of $45. The manager of the Door Division is considering the offer but
wants to approach the Hinge Division first.
What is the maximum transfer price that the Door Division would accept from the Hinge
Division?
A) $20.
B) $35.
C) $45.
D) $50.
74) Retro Rides, Incorporated, operates two divisions: (1) a Management Division that owns and
manages classic automobile rentals in Miami, Florida and (2) a Repair Division that restores
classic automobiles in Clearwater, Florida. The Repair Division works on classic motorcycles, as
well as other classic automobiles.
The Repair Division has an estimated variable cost of $28.50 per labor-hour and has a backlog of
work for automobile restoration. They charge $48.00 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 $30.00 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) $28.50.
B) $30.00.
C) $39.00.
D) $48.00.
75) Retro Rides, Incorporated, operates two divisions: (1) a Management Division that owns and
manages classic automobile rentals in Miami, Florida and (2) a Repair Division that restores
classic automobiles in Clearwater, Florida. The Repair Division works on classic motorcycles, as
well as other classic automobiles.
The Repair Division has an estimated variable cost of $28.50 per labor-hour and has a backlog of
work for automobile restoration. They charge $48.00 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 $30.00 per hour, including leasing an adequate work area.
What is the maximum transfer price per hour that the Management Division should pay?
A) $28.50.
B) $30.00.
C) $39.00.
D) $46.50.
76) Retro Rides, Incorporated, operates two divisions: (1) a Management Division that owns and
manages classic automobile rentals in Miami, Florida and (2) a Repair Division that restores
classic automobiles in Clearwater, Florida. The Repair Division works on classic motorcycles, as
well as other classic automobiles.
The Repair Division has an estimated variable cost of $28.50 per labor-hour and has a backlog of
work for automobile restoration. They charge $48.00 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 $30.00 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) $28.50.
B) $30.00.
C) $39.00.
D) $46.50.
77) Frocks and Gowns, Incorporated, has two divisions, Day Wear and Night Wear. The Day
Wear Division has an investment base of $750,000 and produces and sells 100,000 units of
Collars at a market price of $10.00 per unit. Variable costs for the Collars total $3.50 per unit
and fixed charges are $4.00 per unit (based on a capacity of 120,000 units). The Night Wear
Division wants to purchase 25,000 units of Collars from the Day Wear Division. However, the
Night Wear Division is only willing to pay $6.75 per unit.
What is the contribution margin for the Day Wear Division without the transfer to the Night
Wear Division?
A) $250,000.
B) $650,000.
C) $675,000.
D) $1,000,000.
78) Frocks and Gowns, Incorporated, has two divisions, Day Wear and Night Wear. The Day
Wear Division has an investment base of $750,000 and produces and sells 100,000 units of
Collars at a market price of $10.00 per unit. Variable costs for the Collars total $3.50 per unit
and fixed charges are $4.00 per unit (based on a capacity of 120,000 units). The Night Wear
Division wants to purchase 25,000 units of Collars from the Day Wear Division. However, the
Night Wear Division is only willing to pay $6.75 per unit.
What is the contribution margin for the Day Wear Division if it transfers 25,000 units to the
Night Wear Division at $6.75 per unit?
A) $250,000.
B) $650,000.
C) $675,000.
D) $698,750.
79) Frocks and Gowns, Incorporated, has two divisions, Day Wear and Night Wear. The Day
Wear Division has an investment base of $750,000 and produces and sells 100,000 units of
Collars at a market price of $10.00 per unit. Variable costs for the Collars total $3.50 per unit
and fixed charges are $4.00 per unit (based on a capacity of 120,000 units). The Night Wear
Division wants to purchase 25,000 units of Collars from the Day Wear Division. However, the
Night Wear Division is only willing to pay $6.75 per unit.
What is the minimum transfer price that the Day Wear Division would accept for the 25,000 unit
order from the Night Wear Division if it wishes to maintain its pre-order contribution margin?
A) $3.50.
B) $4.00.
C) $4.80.
D) $6.00.
80) A company is highly centralized. The Cutting Division, which is operating at capacity,
produces a component that it currently sells in a perfectly competitive market for $13 per unit. At
the current level of production, the fixed cost of producing this component is $4 per unit and the
variable cost is $7 per unit. The Grinding Division would like to purchase this component from
the Cutting Division. The price that the Cutting Division should charge the Grinding Division
per unit for this component is:
A) $7.
B) $11.
C) $13.
D) $15.
81) A company has two divisions, Softwoods and Hardwoods, each operating as a profit center.
The Softwood Division charges the Hardwood Division $35 per unit for each unit transferred to
the Hardwood Division. Other data for the Softwood Division are as follows:
Variable Cost per unit
$
30
Fixed Costs
$
10,000
Annual Sales to the Hardwood Division
5,000
units
Annual Sales to Outsiders
50,000
units
The Softwood Division is planning to raise its transfer price to $50 per unit. The Hardwood
Division can purchase units at $40 per unit from outsiders but doing so would idle the Softwood
Division’s facilities (now committed to producing units for the Hardwood Division). The
Softwood Division cannot increase its sales to outsiders. From the perspective of the company
as a whole, from who should the Hardwood Division acquire the units, assuming the Hardwood
Division’s market is unaffected?
A) Outside vendors.
B) The Softwood Division, but only at the variable cost per unit.
C) The Softwood Division, but only until fixed costs are covered, then should purchase from
outside vendors.
D) The Softwood Division, in spite of the increased transfer price.
82) Given the following information for Camping Division:
Selling price to outside customers
$
50
Variable cost per unit
$
30
Total fixed costs
$
400,000
Capacity in units
25,000
The Lantern Division would like to purchase internally from the Camping Division. The Lantern
Division now purchases 5,000 units each period from outside suppliers at $49 per unit. The
Camping Division has ample excess capacity to handle all of the Lantern Division’s needs. What
is the lowest price that the Camping Division could accept?
A) $50.00.
B) $49.00.
C) $46.00.
D) $30.00.
83) Accutron, a large manufacturing company, has several autonomous divisions that sell their
products in perfectly competitive external markets as well as internally to the other divisions of
the company. Top management expects each of its divisional managers to take actions that will
maximize the organization’s goal as well as their own goals. Top management also promotes a
sustained level of management effort of all of its divisional managers. Under these
circumstances, for products exchanged between divisions, the transfer price that will generally
lead to optimal decisions for Accutron would be a transfer price equal to the: (CIA adapted)
A) full cost of the product.
B) full cost of the product plus a markup.
C) variable cost of the product plus a markup.
D) market price of the product.
84) Martin Company currently manufactures all component parts used in the manufacturing of
various hand tools. The Extruding Division produces a steel handle used in three different tools.
The budget for these handles is 120,000 units with the following unit cost:
Direct materials
$
0.60
Direct labor
0.40
Variable overhead
0.10
Fixed overhead
0.20
Total unit cost
$
1.30
The Polishing Division purchases 20,000 handles from the Extruding Division and completes the
hand tools. An outside supplier, Venture Steel, has offered to supply 20,000 units of the handle
to the Polishing Division for $1.25 per unit. The Extruding Division currently has idle capacity
that cannot be used.
What is the cost impact to Martin Company as a whole of purchasing from Venture Steel? (CMA
adapted)
A) increase the handle unit cost by $0.05.
B) increase the handle unit cost by $0.15.
C) decrease the handle unit cost by $0.15.
D) decrease the handle unit cost by $0.25.
85) Martin Company currently manufactures all component parts used in the manufacturing of
various hand tools. The Extruding Division produces a steel handle used in three different tools.
The budget for these handles is 120,000 units with the following unit cost:
Direct material
$
0.60
Direct labor
0.40
Variable overhead
0.10
Fixed overhead
0.20
Total unit cost
$
1.30
The Polishing Division purchases 20,000 handles from the Extruding Division and completes the
hand tools. An outside supplier, Venture Steel, has offered to supply 20,000 units of the handle
to the Polishing Division for $1.25 per unit. The Extruding Division currently has idle capacity
that cannot be used.
If Martin Company would like to develop a range of transfer prices, what would be the
maximum transfer price that the Polishing Division would be willing to pay the Extruding
Division?
A) $1.00.
B) $1.10.
C) $1.25.
D) $1.30.