86) 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 minimum
transfer price that the Extruding Division would be willing to accept?
A) $1.00.
B) $1.10.
C) $1.25.
D) $1.30.
87) The Alpha Division of a company, which is operating at capacity, produces and sells 1,000
units of a certain electronic component in a perfectly competitive market. Revenue and cost data
are as follows: (CIA adapted)
Sales
$
Variable costs
Fixed costs
The minimum transfer price that should be charged to the Beta Division of the same company for
each component is:
A) $12.
B) $34.
C) $46.
D) $50.
88) The Hinges Division of Altoona Corporation sells 80,000 units of part Z-25 to the outside
market. Part Z-25 sells for $40 and has a variable cost per unit of $22 and a fixed cost per unit of
$10. The Hinges Division has a capacity to produce 100,000 units per period. The Door Division
currently purchases 10,000 units of part Z-25 from the Hinges Division for $40. The Door
Division has been approached by an outside supplier willing to supply the parts for $36. If
Altoona uses a negotiated transfer pricing system, what is the maximum transfer price that
should be charged for this transaction?
A) $40.
B) $36.
C) $32.
D) $22.
89) The Hinges Division of Altoona Corporation sells 80,000 units of part Z-25 to the outside
market. Part Z-25 sells for $40 and has a variable cost per unit of $22 and a fixed cost per unit of
$10. The Hinges Division has a capacity to produce 100,000 units per period. The Door Division
currently purchases 10,000 units of part Z-25 from the Hinges Division for $40. The Door
Division has been approached by an outside supplier willing to supply the parts for $36. If
Altoona uses a negotiated transfer pricing system, what is the minimum transfer price that should
be charged for this transaction?
A) $40.
B) $36.
C) $32.
D) $22.
90) The Eastern Division sells goods internally to the Western Division at Tennessee Company.
The quoted external price in industry publications from a supplier near Eastern is $200 per ton
plus transportation. It costs $20 per ton to transport the goods to Western. Eastern’s actual market
cost per ton to buy the direct materials to make the transferred product is $100 and actual per-ton
direct labor is $50. Other actual costs of storage and handling are $40. Tennessee Company’s
president selects a $220 transfer price. This is an example of: (CIA adapted)
A) market-based transfer pricing.
B) cost-based transfer pricing.
C) negotiated transfer pricing.
D) cost plus 20% transfer pricing.
91) Which of the following is the most significant disadvantage of a cost-based transfer price?
(CIA adapted)
A) Requires internally developed information.
B) Imposes market effects on company operations.
C) Requires externally developed information.
D) May not promote long-term efficiencies.
92) An appropriate transfer price between two divisions of The Fathom Company can be
determined from the following data: (CIA adapted)
Fabricating Division
Market price of subassembly
$
50
Variable cost of subassembly
$
20
Excess capacity (in units)
1,000
Assembling Division
Number of units needed
900
What is the natural bargaining range for the two divisions?
A) Between $20 and $50.
B) Between $50 and $70.
C) Any amount less than $50.
D) $50 is the only acceptable transfer price.
93) A limitation of transfer prices based on actual cost is that they: (CIA adapted)
A) charge inefficiencies to the department that is transferring the goods.
B) charge inefficiencies to the department that is receiving the goods.
C) must be adjusted by some markup.
D) lack clarity and administrative convenience.
94) Which of the following is not an appropriate use of transfer pricing?
A) Product costing.
B) Decision making.
C) Establishing standard costs.
D) Evaluating performance.
95) An internal transfer between two divisions is in the best economic interests of the entire
organization when:
A) the variable costs plus the opportunity cost of the selling division is greater than the external
price for the buying division.
B) the variable costs plus the opportunity cost of the selling division is less than the external
price for the buying division.
C) there is excess capacity in the buying division with no alternative use.
D) there is no established market price for the buying division.
96) Top management intervention in settling transfer pricing disputes between two divisions
should be avoided unless
A) there is no intermediate market.
B) the intermediate market is imperfect.
C) there is an extraordinarily large order.
D) there are no opportunity costs.
97) 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 the:
A) negotiated transfer price.
B) transfer price based on full cost.
C) transfer price based on variable cost.
D) transfer price based on an open market price.
98) 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:
A) full cost.
B) direct cost.
C) variable cost.
D) standard cost.
99) Cost-based transfer prices that include a normal markup to the costs act as a surrogate for:
A) negotiated market prices.
B) opportunity costs.
C) differential costs.
D) market prices.
100) Multinational firms often face conflicting pressures when developing transfer pricing
policies. Tax avoidance results when:
A) inflated transfer prices are used to reduce the profits of divisions in high tax-rate countries.
B) inflated transfer prices are used to reduce the profits of divisions in low tax-rate countries.
C) cost-based transfer prices are used instead of market transfer prices in high tax-rate countries.
D) cost-based transfer prices are used instead of negotiated market transfer prices in low tax-rate
countries.
101) Which of the following transfer pricing methods must be used in segment reporting by the
oil and gas industry?
A) Absorption cost.
B) Differential cost.
C) Negotiated market price.
D) Market price.
102) Galena Corporation manufactures RD34 in its City Division. This output is sold to the
Urban Division as a raw material in the Urban Division’s product. The City Division also further
processes the RD34 into RD35, and then sells it to other companies.
The City Division’s variable costs for the basic ingredient are $15 per unit. The Urban Division’s
variable costs are $5 per unit in addition to what it pays the City Division. The Urban Division
has a capacity of 400,000 units and it can sell everything it produces. The market price for the
finished additive is $40 per unit. If the City Division converts the RD34 into RD35, it can
receive $25 per unit on the open market, but it incurs an additional $4 per unit for this
processing.
Required:
(a) What is the lowest price the City Division should be willing to transfer RD34 to the Urban
Division, assuming the City Division is not operating at capacity?
(b) What is the lowest price the City Division should be willing to transfer RD34 to the Urban
Division, assuming the City Division is operating at capacity?
(c) Ignore parts (a) and (b). Assume that the City Division has a capacity of 500,000 units but
can only sell 300,000 on the open market. How many units should the City Division sell
externally and how many units should it sell to Urban Division at a transfer price of $20?
103) Shipping Industries is a decentralized company that evaluates its divisions based on ROI.
The North Division has the capacity to produce 2,000 units of a component. The North
Division’s variable costs are $85 per unit and fixed costs are $70 per unit.
The South Division can use the North Division’s product as a component in one of its products.
The South Division would incur $65 of variable costs to convert the component into its own
product which sells for $310.
Required (consider each question independently):
(a) Assume the North Division can sell all that it produces for $185 each. The South Division
needs 100 units. What is the appropriate transfer price?
(b) Assume the North Division can sell 1,800 units at $265. Any excess capacity will be unused
unless the units are purchased by the South Division (which can use up to 100 units). What are
the minimum and maximum transfer prices?
104) Trevor Company operates several investment centers. The manager of the Genesis Division
expects the following results for the coming year:
Sales (50,000 units at $20)
$
1,000,000
Variable costs
600,000
Contribution margin
$
400,000
Fixed costs
250,000
Profit
$
150,000
Included in the Genesis Division’s variable cost is $7 for a component it buys from an outside
supplier. One of these components is required in each unit of the Genesis Division’s product. The
manager of the Genesis Division has just found that she can buy the component from the Solar
Division, another division of Trevor Company. The Solar Division sells 300,000 units of the
component to outsiders at $8 and its variable cost is $4 per unit. The Solar Division offers to sell
the component to Genesis at a price of $6. Solar is operating well below capacity.
Required:
(a) If Genesis accepts the offer, what will happen to the income of the Solar Division?
(b) If Genesis accepts the offer, what will happen to the income of the Genesis Division?
(c) If Genesis accepts the offer, what will happen to the income of the Trevor Company?
105) The Trevor Company operates several investment centers. The manager of the Genesis
Division expects the following results for the coming year:
Sales (50,000 units at $20)
$
1,000,000
Variable costs
600,000
Contribution margin
$
400,000
Fixed costs
250,000
Profit
$
150,000
Included in the Genesis Division’s variable cost is $7 for a component it buys from an outside
supplier. One of these components is required in each unit of the Genesis Division’s product. The
manager of the Genesis Division has just found that she can buy the component from the Solar
Division, another division of Trevor Company. The Solar Division sells 300,000 units of the
component to outsiders at $8 and its variable cost is $4 per unit. Solar offers to sell the
component to Genesis at a price of $6.
Solar has a capacity of 330,000 units. Assume that Genesis wants to buy all of its needs from one
source, so Solar must supply all or none of the Genesis Division’s needs for 50,000 units.
Required:
(a) Determine the change in income of the Solar Division of supplying the component to Genesis
for $6 per unit as opposed to not supplying the component to Genesis.
(b) Determine the change in income of Trevor Company if Solar supplies the component to
Genesis for $6 per unit.
106) The Barrel Division of Chemco Incorporated has a capacity of 200,000 units and expects
the following results in the coming period:
Sales (160,000 units at $4)
$
640,000
Variable costs, at $2
320,000
Fixed costs
260,000
Income
$
60,000
The Tank Division of Chemco Incorporated currently purchases 50,000 units of a part for one of
its products from an outside supplier for $4 per unit. The Tank Division’s manager believes he
could use a minor variation of the Barrel Division’s product instead and offers to buy the units
from the Barrel Division for $3.50 per unit. Making the variation desired by the Tank Division
would cost the Barrel Division an additional $0.50 per unit and would increase the Barrel
Division’s annual cash fixed costs by $20,000. The Barrel Division’s manager agrees to the deal
offered by the Tank Division’s manager.
Required:
(a) What is the effect of the deal on the Tank Division’s income?
(b) What is the effect of the deal on the Barrel Division’s income?
(c) What is the effect of the deal on the income of Chemco Incorporated as a whole?
107) Division A of Spangler Company expects the following results:
To Division B
To Outsiders
Sales (5,000 × $60)
$
300,000
(25,000 × $72)
$
1,800,000
Variable costs at $36
180,000
900,000
Contribution margin
$
120,000
$
900,000
Fixed costs, all common, allocated on the basis of
relative units
60,000
300,000
Profit
$
60,000
$
600,000
Division B has the opportunity to buy the 5,000 units it needs from an outside supplier at $45
each.
Required (consider each question independently):
(a) Division A refuses to meet the $45 price, sales to outsiders cannot be increased, and Division
B buys from the outside supplier. Compute the effect on the income of Spangler Company.
(b) Division A cannot increase its sales to outsiders, does meet the $45 price, and Division B
continues to buy from Division A. Compute the effect on the income of Spangler Company.
108) Veritron Division of Argos Incorporated has a capacity of 100,000 units and expects the
following results for the year:
Sales (90,000 units at $30)
$
2,700,000
Variable costs, at $20
1,800,000
Fixed costs
700,000
Income
$
200,000
Magnatron Division of Argos Incorporated currently purchases 20,000 units of a part for one of
its products from an outside supplier at $32 per unit. Magnatron’s manager believes she could
use a minor variation of Veritron’s product instead and offers to buy the units from Veritron for
$26 per unit. Making the variation desired by Magnatron would cost Veritron an additional $5
per unit and would increase Veritron’s annual cash fixed costs by $80,000. Veritron’s manager
agrees to the deal offered by Magnatron’s manager.
Required:
(a) What is the effect of the deal on Magnatron’s income?
(b) What is the effect of the deal on Veritron’s income?
(c) What is the effect of the deal on the income of Argos Incorporated as a whole?
109) Division A of Spangler Company expects the following results:
To Division B
To Outsiders
Sales (5,000 × $60)
$
300,000
(25,000 × $60)
$
1,500,000
Variable costs at $36
180,000
900,000
Contribution margin
$
120,000
$
600,000
Fixed costs, all common, allocated on the basis of
relative units
60,000
300,000
Profit
$
60,000
$
300,000
Division B has the opportunity to buy the 5,000 units it needs from an outside supplier at $45
each. Assume that Division A cannot increase sales to outsiders.
Required:
(a) What would be the optimal transfer price?
(b) Assume that Spangler allows the divisional managers to negotiate transfer prices. What
would the maximum transfer price be?
(c) Assume that Spangler allows the divisional managers to negotiate transfer prices. What
would the minimum transfer price be?
110) Winton Industries evaluates its divisions based on residual income. The Springfield
Division has the capacity to produce 20,000 units of a component. The Springfield Division’s
variable costs are $150 per unit and fixed costs are $110 per unit.
The Monnett Division can use the Springfield Division’s product as a component in one of its
products. The Monnett Division would incur $75 of variable costs to convert the component into
its own product which sells for $300.
Required (consider each question independently):
(a) Assume the Springfield Division can sell all that it produces for $285 each. The Monnett
Division needs 1,000 units. What is the appropriate transfer price?
(b) Assume the Springfield Division can sell 18,000 units at $285. Any excess capacity will be
unused unless the units are purchased by the Monnett Division (which can use up to 1,000 units).
What are the minimum and maximum transfer prices?
111) Table Lake Cruises, Incorporated, operates two divisions: (1) a Recreational Division that
owns and manages charter boats on the lake and (2) a Repair Division that works on small
gasoline crafts as well medium-size diesel engine boats. The Repair Division has an estimated
variable cost of $45 per labor-hour and has a backlog of work for diesel engines. They charge
$125 per hour for labor & overhead, which is standard for this type of work. The Recreational
Division complained that it could hire its own repair workers for $85 per hour, including leasing
an adequate work area.
Required:
(a) What is the minimum transfer price per hour that the Repair Division should obtain for its
services, assuming it is operating at capacity?
(b) What is the maximum transfer price per hour that the Recreational Division should pay?
(c) If the Repair Division had idle capacity, what is the minimum transfer price that the Repair
Division should obtain?
112) The Counter Division can sell externally for $60 per unit. Its variable manufacturing costs
are $35 per unit, and its fixed costs are $12 per unit.
Required:
(a) What is the optimal transfer price for transferring internally, assuming the division is
operating at capacity?
(b) What is the optimal transfer price for transferring internally, assuming the division is
operating at well below capacity?