61. The general rule for transfer pricing is stated as:
62. When there is excess capacity in the selling division, which of the following statements is false?
63. What causes difficulties in measuring opportunity cost when implementing the general rule?
64. Which is not a way to set a transfer price?
65. Division A of Friedman Inc. transfers its product to Division B. Division B can either buy the item
internally or externally (cost = $73 each). Division A has just completed its annual cost update as follows:
Division A is operating at 60 percent of its 400,000 unit capacity.
Required:
1) What is the minimum transfer price Division A should charge for internal transfers?
2) What is the maximum price Division B would be willing to pay?
3) Why should Division A reduce its price to Division B?
66. The following costs exist for Division M of Clark Corp.
The output of Division M, which sells for $10/unit externally, is used by Division N.
Required: Compute the transfer price for a unit of Division M’s output using:
1) market price
2) variable production cost plus 30 percent
3) absorption cost plus 25 percent
4) variable cost
5) total cost plus 10 percent
67. Grupe Inc. has a division located in Spain and another in the U.S. the Spanish division produces a part
needed for the product made by the U.S. division. There is substantial excess capacity in the Spanish division.
The tax rate of the Spanish division is 35% and U.S. division tax rate is 30%.
The part sells externally for $75 and the Spanish division’s manufacturing costs are:
Required:
1) What would be the lowest acceptable transfer price for the Spanish division?
2) What would be the highest acceptable transfer price for the U.S. division?
3) What would be the transfer price that would be the best for Grupe Inc and why?
68. Explain how the presence or absence of excess capacity affects transfer pricing policy?
69. Briefly describe the differences between a market-price and a negotiated-price transfer price.
70. Discuss briefly the issues of goal and behavioral congruence that impact a transfer pricing policy.
71. The following information is available for the two divisions of CPAECON Co.:
Division A has no excess production capacity.
Required:
1) In order to ensure the best use of the productive capacity of A, what transfer price should be set by Division
A and what effect does this transfer price have on the overall margin for the company? Is the answer goal
congruent under the general rule?
2) Should Division B accept a special order for its product if the selling price is reduced to $70. Use your
answer from #1 and explain.
3) Would your answer to #2 change if Division A had excess capacity? Explain.
72. Watts Company has used market price as its transfer price for Division Z for many years with no problems.
This year, because of changes in the economy, the demand for its final product has dropped along with the price.
Required: Explain the problems of basing the transfer prices on distress market prices and possible solutions to
the problems.
73. Litwak Inc. has two divisions: production and marketing, which it treats as profit centers. Because the
production division has no marketing capabilities, it does not have a traditional market price to consider and the
company does not want to use negotiation.
Required: Discuss the following cost-based transfer prices along with problems that might exist for each.
1) Standard unit–level cost
2) Absorption (full) cost
3) Actual cost
74. Briefly discuss some of the general issues of multinational transfer pricing.
75. During the current year Ruby Company’s foreign division A incurred production costs of $4 million for
units that are transferred to its other foreign division, B. Costs in Division B, outside of the costs of production
of the final product are $8 million. These are third-party costs. Sales revenue for the final product for Division
B is $30 million. Other companies in the same country import a similar type of part as Division B at a cost of $7
million. Ruby has set its transfer price at $14 million, justifying this price because of the special controls it has
on the operations in Division A as well as its special manufacturing method. The tax rate in the country where
Division A is located is 40% while the tax rate for Division B‘s country is 70%.
Required:
1) What would Ruby’s total tax liability for both divisions be if it used the $7 million transfer price?
2) What would the liability be if it used the $14 million transfer price?
76. How do import duties affect transfer pricing?
77. Briefly discuss transfer prices in relation to external segment reporting under GAAP.
78. Mr. Dessler, the Production V.P. is looking at two of the Divisions that report to him. These divisions are
viewed as profit centers by the company. He has called in the head of Division A which provides a part used by
Division M because he has noticed that Division M is going to an external supplier for the part. Mr. Araz, the
head of Division A, tells him that he has set the transfer price at $38 per part even though the external price is
$33 per part. The standard unit–level cost is $22. “I have set the $38 price because I am operating with no excess
capacity and do not want to have the internal transfer to Division M. I have some good external customers and
do not want to lose them by selling internally. If I had excess capacity, I would willing sell to Division M at a
lower price.“
79. Ms. Marwan, one of the marketing managers, has come to the meeting with a number of reports about one
of her products. The Marketing V.P. sees her agitation and asks her what the problem is. “Well, the product
made by the East Coast Division is losing sales even after the price had been lowered drastically. The manager
of the division is threatening to close because of the reduced demand.”
80. Whey Inc. has just purchased a foreign subsidiary that makes a component used by one of the domestic
divisions. Ms. Bierko, the controller, has been asked about issues that should be considered in establishing a
transfer price for the new subsidiary. Since this is Wheys’ first foray into the multinational arena, there is little
to no expertise in international issues in the company. Ms. Bierko has told her boss that she will get back to him
with a report as to the issues to be considered. She then calls a friend of hers at a branch of one of the big-4
CPA firms that deals with international issues for some help.
Required: What is the basic information that Ms. Bierko will be given by her friend?
81. Mr. Cummings, the controller, and Ms. Trevino, the CPA, are going over the final versions of the financial
statements before the audit is completed. The last part of the work being discussed is the segment reporting
section. Mr. Clark is questioning the comments made by Ms. Trevino regarding the use of negotiated transfer
prices by the firm for the major segments being shown.
Required: Explain to Mr. Cummings the issue according to the FASB (SFAS 14).
82. Washington Farms Inc. is in the process of decentralizing. However, they have discovered that one of the
divisions that they want to set up as a profit center does not have an external market for its product. Mr. Raines,
the manager of the division, has come to Ms. Almeida, the controller, asking what he should use as a transfer
price because of the lack of a market price. The division would be transferring its product internally to another
division that uses the part as input to its product.
Required: Explain, as Ms. Almeida, the options available other than market price.
83. Dalin Inc. has two divisions: the Liquid Division that manufactures chocolate and sells the liquid both
internally and externally; and the Bar Division that manufactures candy bars. The Bar Division currently
purchases liquid chocolate from the Liquid Division for $6 a gallon. They recently received a bid from the Sly
Company to provide liquid chocolate at a price of $4.50 a gallon. The Liquid Division does not want to meet the
price, saying it will cost them money because their costs are $5 per gallon.
Required:
1) What is the Liquid Division Income:
a) Currently
b) If it accepts the $4.50 price
c) If it does not accept the $4.50 price
2) What other issues need to be considered
84. Jonah, Inc has two operating divisions in a decentralized structure. Division X is located in the US and
produces the Teeth X, which is an input to Division Y’s WhaleY. Division Y is located in the South of France.
Division X uses idle capacity to produce Teeth X. Teeth X has a US domestic market price of $60. Its variable
costs are $25 per unit. Jonah’s US tax rate is 40% of income.
In addition to the transfer price for each Teeth X “purchased” from DivisionX, Division Y also pays a shipping
fee of $15 per unit. The WhaleY requires an additional $10 to produce and sells in France for an equivalent of
$115 U.S. dollars. The company’s French tax rate is 70% of income. Assume French tax laws permit
transferring at either variable cost or market price.
1) What income will Jonah, Inc receive if the variable cost is used for the transfer price?
2) What income will Jonah, Inc receive if the market price is used for the transfer price?
3) What transfer Price is economically optimal for Jonah, Inc.