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16) If the Polishing Division sells 100,000 pairs of shoes at a price of $120 a pair to customers, what is the
operating income of both divisions together?
A) $8,800,000
B) $6,800,000
C) $6,000,000
D) $5,200,000
Answer the following questions using the information below:
Plish Company manufactures only one type of washing machine and has two divisions, the Compressor
Division, and the Fabrication Division. The Compressor Division manufactures compressors for the
Fabrication Division, which completes the washing machine and sells it to retailers. The Compressor
Division "sells" compressors to the Fabrication Division. The market price for the Fabrication Division to
purchase a compressor is $40.00. (Ignore changes in inventory.) The fixed costs for the Compressor
Division are assumed to be the same over the range of 5,000-10,000 units. The fixed costs for the
Fabrication Division are assumed to be $7.50 per unit at 10,000 units.
Compressor's costs per compressor are:
Direct materials $15.00
Direct labor $7.25
Variable overhead $3.00
Division fixed costs $7.50
Fabrication's costs per completed air conditioner are:
Direct materials $150.00
Direct labor $62.50
Variable overhead $20.00
Division fixed costs $7.50
17) What is the market-based transfer price per compressor from the Compressor Division to the
Fabrication Division?
A) $17.00
B) $27.25
C) $34.75
D) $40.00
18) What is the transfer price per compressor from the Compressor Division to the Fabrication Division if
the method used to place a value on each compressor is 150% of variable costs?
A) $22.50
B) $37.88
C) $45.00
D) $50.50
19) What is the transfer price per compressor from the Compressor Division to the Fabrication Division if
the transfer price per compressor is 110% of full costs?
A) $16.50
B) $24.50
C) $28.18
D) $36.03
20) Assume the transfer price for a compressor is 150% of total costs of the Compressor Division and
1,000 of the compressors are produced and transferred to the Fabrication Division. The Compressor
Division's operating income is ________.
A) $15,875
B) $16,375
C) $17,375
D) $18,250
21) If the Fabrication Division sells 1,000 air conditioners at a price of $375.00 per washing machine to
customers, what is the operating income of both divisions together?
A) $105,500
B) $102,250
C) $97,000
D) $82,875
Answer the following questions using the information below:
Division A sells ground veal internally to Division B, which in turn, produces veal burgers that sell for
$10 per pound. Division A incurs costs of $1.25 per pound while Division B incurs additional costs of
$5.00 per pound.
22) What is Division A's operating income per burger, assuming the transfer price of the ground veal is
set at $2.00 per burger?
A) $0.75
B) $1.50
C) $2.25
D) $3.00
23) Which of the following formulas correctly reflects the company's operating income per pound?
A) $10.00 - ($1.25 + $5.00) = $3.75
B) $10.00 - ($2.50 + $5.00) = $2.50
C) $10.00 - ($1.25 + $7.50) = $1.25
D) $10.00 - ($0.50 + $2.50 + $7.00) = 0
24) The choice of a transfer-pricing method has minimal effect on the allocation of company-wide
operating income among divisions.
25) Transfer prices do not affect managers whose compensation is directly dependent on an
organization's operating income because transfer prices affect only divisional profits and not the
organization's profit.
26) Hybrid transfer prices take into account both cost and market information.
27) Hybrid transfer prices can be arrived at through negotiations.
28) Negotiated transfer prices are often employed when market prices are stable.
29) The cost used in cost-based transfer prices can be actual cost or budgeted cost.
30) For each of the following, identify whether it BEST relates to market-based, cost-based, negotiated, or
all types of transfer pricing.
________ a. Bargaining between selling and buying units
________ b. Budgeted costs
________ c. 145% of full costs
________ d. Internal product transfers are required if goods are available internally
________ e. Manufacturing costs plus marketing costs plus distribution costs
plus customer service costs
________ f. Prices listed in a trade journal
________ g. Selling price less normal sales commissions
________ h. Variable manufacturing cost plus a markup
31) For each of the following statements regarding the satisfaction of transfer pricing criteria, identify
whether you would expect the transfer pricing method to meet the criteria. Provide a yes, no, or
sometimes for each situation.
________ a. Market-Based transfer pricing achieves goal congruence.
________ b. Cost-Based transfer pricing achieves goal congruence.
________ c. Negotiated transfer pricing achieves goal congruence.
________ d. Market-Based transfer pricing motivates management effort.
________ e. Cost-Based transfer pricing motivates management effort.
________ f. Negotiated transfer pricing motivates management effort.
________ g. Market-Based transfer pricing is useful for evaluating subunit performance.
________ h. Cost-Based transfer pricing is useful for evaluating subunit performance.
________ i. Negotiated transfer pricing is useful for evaluating subunit performance.
________ j. Market-Based transfer pricing preserves subunit autonomy.
________ k. Cost-Based transfer pricing preserves subunit autonomy.
________ l. Negotiated transfer pricing preserves subunit autonomy.
32) The Mill Flow Company has two divisions. The Cutting Division prepares timber at its sawmills. The
Coating Division prepares the cut lumber into finished wood for the furniture industry. No inventories
exist in either division at the beginning of 20X5. During the year, the Cutting Division prepared 60,000
cords of wood at a cost of $660,000. All the lumber was transferred to the Coating Division, where
additional operating costs of $5 per cord were incurred. The 600,000 boardfeet of finished wood were sold
for $2,500,000.
Required:
a. Determine the operating income for each division if the transfer price from Cutting to Coating is at
cost - $11 a cord.
b. Determine the operating income for each division if the transfer price is $9 per cord.
c. Since the Cutting Division sells all of its wood internally to the Coating Division, does the manager
care what price is selected? Why? Should the Cutting Division be a cost center or a profit center under the
circumstances?
33) Sandra's Sheet Metal Company has two divisions. The Raw Material Division prepares sheet metal at
its warehouse facility. The Finishing Division prepares the cut sheet metal into finished products for the
air conditioning industry. No inventories exist in either division at the beginning of 20X8. During the
year, the Raw Material Division prepared 450,000 square feet of sheet metal at a cost of $1,800,000. All the
sheet metal was transferred to the Finishing Division, where additional operating costs of $1.50 per
square foot were incurred. The 450,000 square feet of finished fabricated sheet metal products were sold
for $3,875,000.
Required:
a. Determine the operating income for each division if the transfer price from Raw Material to Finishing
is at a cost of $4 per square foot.
b. Determine the operating income for each division if the transfer price is $6 per square foot.
c. Since the Raw Materials Division sells all of its sheet metal internally to the Finishing Division, does
the Raw Materials manager care what price is selected? Why? Should the Raw Materials Division be a
cost center or a profit center under the circumstances?
34) Bedtime Bedding Company manufactures pillows. The Cover Division makes covers and the
Assembly Division makes the finished products. The covers can be sold separately for $5.00. The pillows
sell for $6.00. The information related to manufacturing for the most recent year is as follows:
Cover Division manufacturing costs
$6,000,000
Sales of covers by Cover Division
4,000,000
Market value of covers transferred to Assembly
6,000,000
Sales of pillows by Assembly Division
7,200,000
Additional manufacturing costs of Assembly Division
1,500,000
Required:
Compute the operating income for each division and the company as a whole. Use market value as the
transfer price. Are all managers happy with this concept? Explain.
35) DesMoines Valley Company has two divisions, Computer Services and Consultancy Services. In
addition to their external customers, each division performs work for the other division. The external fees
earned by each division in 20X5 were $200,000 for Computer Services and $350,000 for Consultancy
Services. Computer Services worked 3,000 hours for Consultancy Services, who, in turn, worked 1,200
hours for Computer Services. The total costs of external services performed by Computer Services were
$110,000 and $240,000 by Consultancy Services.
Required:
a. Determine the operating income for each division and for the company as a whole if the transfer price
from Computer Services to Consultancy Services is $15 per hour and the transfer price from Consultancy
Services to Computer Services is $12.50 per hour.
b. Determine the operating income for each division and for the company as a whole if the transfer price
between divisions is $17 per hour.
c. What are the operating income results for each division and for the company as a whole if the two
divisions net the hours worked for each other and charge $12.50 per hour for the one with the excess?
Which division manager prefers this arrangement?
32
36) Olive branch Company recently acquired an olive oil processing company that has an annual capacity
of 2,000,000 liters and that processed and sold 1,400,000 liters last year at a market price of $4 per liter.
The purpose of the acquisition was to furnish oil for the Cooking Division. The Cooking Division needs
800,000 liters of oil per year. It has been purchasing oil from suppliers at the market price. Production
costs at capacity of the olive oil company, now a division, are as follows:
Direct materials per liter
$1.00
Direct processing labor
0.50
Variable processing overhead
0.24
Fixed processing overhead
0.40
Total
$2.14
Management is trying to decide what transfer price to use for sales from the newly acquired company to
the Cooking Division. The manager of the Olive Oil Division argues that $4, the market price, is
appropriate. The manager of the Cooking Division argues that the cost of $2.14 should be used, or
perhaps a lower price, since fixed overhead cost should be recomputed with the larger volume. Any
output of the Olive Oil Division not sold to the Cooking Division can be sold to outsiders for $4 per liter.
Required:
a. Compute the operating income for the Olive Oil Division using a transfer price of $4.
b. Compute the operating income for the Olive Oil Division using a transfer price of $2.14.
c. What transfer price(s) do you recommend? Compute the operating income for the Olive Oil Division
using your recommendation.
37) Briefly explain each of the three methods used to determine a transfer price.
38) How does cost-based transfer price method help managers to determine transfer prices?
1) Which of the following markets is said to exist when there is a homogeneous product with many
sellers?
A) monopoly market
B) oligopoly market
C) monopolistic market
D) perfect market
2) A perfectly competitive market exists when ________.
A) individual buyers or sellers can affect prices by their own actions
B) market prices reach well above their historical averages due to demand outstripping supply
C) market prices drop well below their historical averages due to supply outstripping demand
D) there is a homogeneous product with buying prices equal to selling prices
3) A benefit of using a market-based transfer price is that the ________.
A) profits of the transferring division are sacrificed for the overall good of the corporation
B) profits of the division receiving the products are sacrificed for the overall good of the corporation
C) economic viability and profitability of each division can be evaluated individually
D) transferring division can be assured of recovering its full costs in all scenarios
4) When an industry has excess capacity, market prices may drop well below their historical average. If
this drop is temporary, it is called ________.
A) distress prices
B) dropped prices
C) low-average prices
D) substitute prices
5) Market-based transfer prices are helpful when ________.
A) the product is specialized
B) the internal product is different from the products available externally in terms of its quality
C) the interdependencies of subunits are minimal
D) the markets are not perfectly competitive
6) If the distress price is used as the transfer price, ________.
A) the selling division will show a loss because the distress price will not exceed the full cost of the
division
B) the buying division will show a loss because the distress price will not exceed the full cost of the
division
C) the selling division will show a loss because the distress price will exceed the full cost of the division
D) the buying division will show a loss because the distress price will exceed the full cost of the division
7) Briefly describe the conditions that should be met for market-based transfer pricing to lead to optimal
decision making among subunits of a large organization.
8) What are distress prices and which transfer prices should be used for judging performance if distress
prices prevail?
1) When companies do not want to use market prices or find it too costly, they typically use ________
prices, even though suboptimal decisions may occur.
A) average-cost
B) full-cost
C) long-run cost
D) short-run average cost
2) Aerated Water Company makes internal transfers at 180% of full cost. The Soda Refining Division
purchases 30,000 containers of carbonated water per day, on average, from a local supplier, who delivers
the water for $30 per container via an external shipper. To reduce costs, the company located an
independent supplier in Missouri who is willing to sell 30,000 containers at $22 each, delivered to
Aerated Water Company's Shipping Division in Missouri. The company's Shipping Division in Missouri
has excess capacity and can ship the 30,000 containers at a variable cost of $1.50 per container. What is the
total cost to Aerated Water Company if the carbonated water is purchased from the local supplier?
A) $900,000
B) $1,200,000
C) $1,501,000
D) $1,620,000
