ch15

Student: ___________________________________________________________________________

1. A transfer price is the value assigned to the transfer of goods or services between divisions within the same
organization.

True False
2. Transfer prices are not used to record the exchange between two cost centers within the same organization.

True False
3. Transfer prices cannot be used for decision making, product costing, or performance evaluation.

True False
4. From an organization's viewpoint, transfer prices have no effect on total profits assuming the transfer
occurs between the two responsibility centers.

True False
5. If a transfer has no effect on divisional profit, risk-neutral managers will be indifferent between making the
transfer or not.

True False
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.

True False
7. A perfect intermediate market exists if buyers can buy and sellers can sell outside of the organization.

True False
8. When a perfect intermediate market exists, the optimal transfer price is the intermediate market price.

True False
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.

True False
10. The use of an optimal transfer price eliminates potential conflicts between an organization's interests and
the divisional manager's interest.

True False
11. A market price-based transfer price policy allows the selling division to determine the price for transfers
between divisions within the same organization.

True False
12. A selling division at capacity is indifferent between selling to outsiders and transferring inside at the market
price.

True False
13. When actual costs are used as the basis for a transfer, inefficiencies of the selling division are transferred to
the buying division.

True False
14. A transfer made at cost does not motivate the selling division to transfer its goods or services internally.

True False
15. In general, negotiated transfer prices fall in a range between the selling division's differential costs and the
buying division's market price.

True False
16. In the United States, more companies use cost-based transfer prices than market-based transfer prices.

True False
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.

True False
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.

True False
19. An organization that has significant foreign operations must disclose how its transfer prices are established
between domestic and foreign divisions.

True False
20. The GAAP financial reporting rules for segments require that all companies use transfer prices based on
market prices.

True False
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.

A. Only A is false.
B. Only B is false.
C. Both A and B are false.
D. Neither A nor B is false.
22. Which of the following responsibility centers is affected by the use of market-based transfer prices?

A. cost center.
B. profit center.
C. revenue center.
D. production center.
23. Transfer prices would not be used by

A. production centers.
B. investment centers.
C. profit centers.
D. cost centers.
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.

A. Only A is true.
B. Only B is true.
C. Both A and B are true.
D. Neither A nor B is true.
25. In general, if a potential transfer has no effect on divisional profits,

A. no transfer will take place between the divisions.

B. managers will be indifferent between making the transfer or not.
C. the organization should not intervene to force a transfer.
D. the optimal transfer price is the opportunity cost for the buying division.
26. An intermediate market is perfect when

A. there is no quality differences between inside and outside suppliers.

B. there is no quality differences between inside and outside customers.
C. buyers and sellers can sell any quantity without affecting the market price.
D. buyers and sellers are motivated to make decisions that are consistent with those of the organization.
27. When there is no intermediate market,

A. there is no optimal transfer price.

B. the selling division cannot transfer its goods internally.
C. the buying division cannot purchase its goods externally.
D. there is no reason for top management to intervene in transfer pricing disputes.
28. The general principle on setting transfer prices that are in the organization's best interests is:

A. outlay cost plus opportunity cost of the resource at the point of transfer.
B. variable costs plus opportunity cost of the resource at the point of transfer.
C. lost contribution margin less the allocated fixed costs for the selling division.
D. gross margin for the buying division plus the gross margin for the selling division.
29. The optimal transfer price when there are intermediate markets is

A. full cost.
B. outlay costs.
C. variable cost.
D. market prices.
E. negotiated market prices.
30. Which of the following is not an appropriate use of transfer pricing?

A. product costing
B. decision making
C. establishing standards
D. evaluating performance
31. An internal transfer between two divisions is in the best economic interest 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 prices for the buying division.
32. Top management intervention in settling transfer pricing disputes between two divisions should be avoided
unless

A. there is no intermediate markets.

B. the intermediate market is imperfect.
C. there is an extraordinarily large order.
D. there is no opportunity costs.
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

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.
34. If the selling division has excess capacity, the transfer price should be set at its

A. differential outlay costs.

B. differential outlay costs plus the foregone contribution to the organization of making the transfer
internally.
C. selling price less the variable costs.
D. selling price less the variable costs plus the foregone contribution to the organization of making the
transfer internally.
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

A. full cost.
B. direct cost.
C. variable cost.
D. standard cost.
E. absorption cost.
36. 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.
37. Given a competitive outside market for identical intermediate goods, what is the BEST transfer price,
assuming all relevant information is readily available?

A. standard production cost per unit.

B. market price of the intermediate goods.
C. actual full cost per unit plus a normal markup.
D. market price of the final goods less any opportunity costs.
38. 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.
39. 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.
40. A division can sell externally for $40 per unit. Its variable manufacturing costs are $15 per unit, and its
variable marketing costs are $6 per unit. What is the opportunity cost of transferring internally, assuming
the division is operating at capacity?

A. $15
B. $19
C. $21
D. $25
41. Division A has variable manufacturing costs of $25 per unit and fixed costs of $5 per unit. Division A is
operating at capacity, what is the opportunity cost of an internal transfer when the market price is $35?

A. $5
B. $10
C. $25
D. $30
E. $35
42. Chipper Division of Acme Corp. 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. Chipper has a capacity to produce 100,000
units per period. Jones Division currently purchases 10,000 units of part Z-25 from Chipper for $40.
Jones has been approached by an outside supplier willing to supply the parts for $36. What is the effect on
Acme's overall profit if Chipper REFUSES the outside price and Jones decides to buy outside?

A. no change
B. $140,000 decrease in Acme profits
C. $80,000 decrease in Acme profits
D. $40,000 increase in Acme profits
43. Chipper Division of Acme Corp. 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. Chipper has a capacity to produce 100,000
units per period. Jones Division currently purchases 10,000 units of part Z-25 from Chipper for $40.
Jones has been approached by an outside supplier willing to supply the parts for $36. What is the effect on
Acme's overall profit if Chipper ACCEPTS the outside price and Jones continues to buy inside?

A. no change
B. $140,000 decrease in Acme profits
C. $80,000 decrease in Acme profits
D. $40,000 increase in Acme profits
44. Chipper Division of Acme Corp. 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. Chipper has a capacity to produce 100,000
units per period. Jones Division currently purchases 10,000 units of part Z-25 from Chipper for $40. Jones
has been approached by an outside supplier willing to supply the parts for $36. If Acme 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
45. Chipper Division of Acme Corp. 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. Chipper has a capacity to produce 100,000
units per period. Jones Division currently purchases 10,000 units of part Z-25 from Chipper for $40. Jones
has been approached by an outside supplier willing to supply the parts for $36. If Acme 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
46. Redimix Corporation has two producing centers, (A and B) Division A has a variable cost of $12 for its
products and a total fixed cost of $120,000. Division A also has idle capacity for up to 50,000 units per
month. Division B would like to purchase 20,000 units of Division A's products per month, but is unable to
convince Division A to transfer units to Division B at $16 per unit. Division A has consistently argued that
the market price of $20 is nonnegotiable. What is A's opportunity cost of not transferring units to B?

A. $20
B. $12
C. $8
D. $4
47. You have been provided with the following information for Division X of a decentralized company:

Division W would like to purchase all of its units internally. Division W needs 6,000 units each period and
currently pays $42 per unit to an outside firm. What is the lowest price that Division X could accept from
Division W? Assume that Division W wants to use a sole supplier and will not purchase less than 6,000
from a supplier.

A. $45.
B. $42.
C. $40.
D. $38.
E. $33.
48. Given the following data for Division X:

Division Y would like to purchase 15,000 units each period from Division X. Division X has ample excess
capacity to handle all of Division Y's needs. Division Y now purchases from an outside supplier at a price
of $20. If Division X 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.
E. $195,000.
49. Given the following data for Division A:

Assume that Division A is selling all it can produce to outside customers. If it sells to Division B, $1 can
be avoided in variable cost per unit. Division B 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 Division B should be priced at

A. $40.
B. $39.
C. $38.
D. $37.
E. The company would not want the transfer to take place.
50. Given the following data for Division L:

Division N would like to purchase 10,000 units from Division L at a price of $125 per unit. Division L has
no excess capacity to handle Division N's requirements. Division N currently purchases from an outside
supplier at a price of $140. If Division L 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
Avery Corporation has two divisions, A and B, which are both organized as profit centers; Division A
produces and sells widgets to Division B and to outside customers. Division A has total costs of $35, $20 of
which are variable. Division A is operating significantly below capacity and sells the widgets for $50.
Division B has received an offer from an outsider vendor to supply all the widgets it needs (20,000
widgets) at a cost of $45. The manager of Division B is considering the offer but wants to approach
Division A first.
51. What would be the profit impact to Avery Corporation as a whole if Division B purchased the 20,000
widgets it needs from the outside vendor for $45?

A. no change in profit to Avery

B. $100,000 increase in profits
C. $100,000 decrease in profits
D. $500,000 decrease in profits
52. What is the minimum transfer price from Division A to Division B?

A. $20
B. $35
C. $45
D. $50
53. What is the maximum transfer price from Division A to Division B?

A. $20
B. $35
C. $45
D. $50
Cruises, Inc., operates two divisions: (1) a management division that owns and manages cruise ships in the
Florida Keys and (2) a repair division that operates a dry dock in Marble Sand Florida. The repair division
works on company ships, as well as other large-hull ships.
The repair division has an estimated variable cost of $28.50 per labor-hour. The repair division has a
backlog of work for outside ships. 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.
54. 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. $46.50
E. $48.00
55. 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
E. $48.00
56. 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
E. $48.00
Flowers and Flowers, Inc., has two divisions. Division A has an investment base of $750,000 and produces
(and sells) 100,000 units of Eyne at a market price of $10.00 per unit. Variable costs total $3.50 per unit,
and fixed charges are $4.00 per unit (based on a capacity of 120,000 units). Division B wants to purchase
25,000 units of Eyne from Division A. However, Division B is only willing to pay $6.75 per unit.
57. What is the contribution margin for Division A without the transfer to Division B?

A. $250,000
B. $650,000
C. $675,000
D. $1,000,000
58. What is the contribution margin for Division A if it transfers 25,000 units to Division B at $6.75 per unit?

A. $250,000
B. $650,000
C. $675,000
D. $698,750
59. What is the minimum transfer price for the 25,000 unit order that Division A would accept if it wishes to
maintain its pre-order contribution?

A. $3.50
B. $4.00
C. $4.80
D. $6.00
60. A company is highly centralized. Division X, 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. Division Y would
like to purchase this component from Division X. The price that Division X should charge Division Y per
unit for this component is

A. $7.
B. $11.
C. $13.
D. $15.
61. A company has two divisions, A and B, each operated as a profit center. Division A charges Division B
$35 per unit (for each unit transferred to Division B). Other data for Division A are as follows:

Division A is planning to raise its transfer price to $50 per unit. Division B can purchase units at $40 per
unit from outsiders, but doing so would idle Division A's facilities (now committed to producing units for
Division B), Division A cannot increase its sales to outsiders. From the perspective of the company as a
whole, from who should Division B acquire the units, assuming Division B's market is unaffected?

A. Outside vendors.
B. Division A, but only at the variable cost per unit.
C. Division A, but only until fixed costs are covered, then should purchase from outside vendors.
D. Division A, in spite of the increased transfer price.
Cohasset Company currently manufactures all component parts used in the manufacture of various hand
tools. Hurley Division produces a steel handle used in three different tools. The budget for these handles is
120,000 units with the following unit cost.

Ironwood Division purchases 20,000 handles from Hurley Division and completes the hand tools. An
outside supplier, R & M Steel, has offered to supply 20,000 units of the handle to Ironwood Division for
$1.25 per unit. Hurley currently has idle capacity that cannot be used.
62. What is the cost impact to Cohasset as a whole of purchasing from R & M Steel? (CMA adapted)

A. increase the handle unit cost by $.05.

B. increase the handle unit cost by $.15.
C. decrease the handle unit cost by $.15.
D. decrease the handle unit cost by $.25.
E. decrease the handle unit cost by $.05.
63. If Cohasset would like to develop a range of transfer prices, what would be the maximum transfer price that
Ironwood would be willing to pay?

A. $1.00
B. $1.10
C. $1.25
D. $1.30
64. If Cohasset would like to develop a range of transfer prices, what would be the minimum transfer price that
Hurley would be willing to accept?

A. $1.00
B. $1.10
C. $1.25
D. $1.30
65. Given the following information for Division K:

Division L would like to purchase internally from Division K. Division L now purchases 5,000 units
each period from outside suppliers at $49 per unit. Division K has ample excess capacity to handle all of
Division L's needs. What is the lowest price that Division K could accept?

A. $50.00
B. $49.00
C. $46.00
D. $39.50
E. $30.00
66. 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.
67. 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 the manufacturing company 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.
68. The Eastern division sells goods internally to the Western division of the same 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. Actual per-ton direct labor is $50. Other actual costs of
storage and handling are $40. The company 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.
69. 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.
70. An appropriate transfer price between two divisions of The Stark Company can be determined from the
following data: (CIA adapted)

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
71. 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)

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
Parkside Inc. has several divisions that operate as decentralized profit centers. Parkside's Entertainment
Division manufactures video arcade equipment using the products of two of Parkside's other divisions. The
Plastics Division manufactures plastic components, one type that is made exclusively for the Entertainment
Division, while other less complex components are sold to outside markets. The products of the Video
Cards Division are sold in a competitive market; however, one video card model is also used by the
Entertainment Division. The actual costs per unit used by the Entertainment Division are presented in the
next column. (CMA adapted)

The Plastics Division sells its commercial products at full cost plus a 25% markup and believes the
proprietary plastic component made for the Entertainment Division would sell for $6.25 per unit on the
open market. The market price of the video card used by the Entertainment Division is $10.98 per unit.
72. A per-unit transfer price from the Video Cards Division to the Entertainment Division at full cost, $9.15,
would

A. allow evaluation of both divisions on a competitive basis.

B. satisfy the Video Cards Division's profit desire by allowing recovery of opportunity costs.
C. provide no profit incentive for the Video Cards Division to control or reduce costs.
D. encourage the Entertainment Division to purchase video cards from an outside source.
73. Assume that the Entertainment Division is able to purchase a large quantity of video cards from an outside
source at $8.70 per unit. The Video Cards Division, having excess capacity, agrees to lower its transfer
price to $8.70 per unit. This action would

A. optimize the profit goals of the Entertainment Division while subverting the profit goals of Parkside Inc.
B. allow evaluation of both divisions on the same basis.
C. subvert the profit goals of the Video Cards Division while optimizing the profit goals of the
Entertainment Division.
D. optimize the overall profit goals of Parkside Inc.
74. Assume that the Plastics Division has excess capacity and it has negotiated a transfer price of $5.60 per
plastic component with the Entertainment Division. This price will

A. cause the Plastics Division to reduce the number of commercial plastic components it manufactures.
B. motivate both divisions as estimated profits are shared.
C. encourage the Entertainment Division to seek an outside source for plastic components.
D. demotivate the Plastics Division causing mediocre performance.
75. A division can sell externally for $60 per unit. Its variable manufacturing costs are $35 per unit, and its
variable marketing costs are $12 per unit. What is the opportunity cost of transferring internally, assuming
the division is operating at capacity?

A. $13
B. $25
C. $35
D. $47
76. A division can sell externally for $60 per unit. Its variable manufacturing costs are $35 per unit, and its
variable marketing costs are $12 per unit. What is the optimal transfer price for transferring internally,
assuming the division is operating at capacity?

A. $12
B. $35
C. $47
D. $60
77. Division A has variable manufacturing costs of $50 per unit and fixed costs of $10 per unit. Division A is
operating at capacity, what is the opportunity cost of an internal transfer when the market price is $75?

A. $20
B. $25
C. $50
D. $60
E. $75
78. Division A has variable manufacturing costs of $50 per unit and fixed costs of $10 per unit. Division A is
operating at capacity, what is the optimal transfer price of an internal transfer when the market price is $75?

A. $20
B. $25
C. $50
D. $60
E. $75
79. Division A has variable manufacturing costs of $50 per unit and fixed costs of $10 per unit. Division A is
operating significantly below capacity, what is the optimal transfer price of an internal transfer when the
market price is $75?

A. $20
B. $25
C. $50
D. $60
E. $75
80. Division B has variable manufacturing costs of $50 per unit and fixed costs of $10 per unit. Division B is
operating significantly below capacity, what is the opportunity cost of an internal transfer when the market
price is $75?

A. $0
B. $25
C. $50
D. $60
E. $75
Cascade Cliffs, Inc., operates two divisions: (1) a management division that owns and manages bulk
carriers on the Great Lakes and (2) a repair division that operates a dry dock in Cheboygan, Michigan. The
repair division works on company ships, as well as other large-hull ships.
The repair division has an estimated variable cost of $37 per labor-hour. The repair division has a backlog
of work for outside ships. They charge $70.00 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 $45.00 per hour,
including leasing an adequate work area.
81. What is the minimum transfer price per hour that the repair division should obtain for its services, assuming
it is operating at capacity?

A. $33.00
B. $37.00
C. $45.00
D. $70.00
E. $82.00
82. What is the maximum transfer price per hour that the management division should pay?

A. $33.00
B. $37.00
C. $45.00
D. $70.00
E. $82.00
83. If the repair division had idle capacity, what is the minimum transfer price that the repair division should
obtain?

A. $33.00
B. $37.00
C. $45.00
D. $70.00
E. $82.00
84. You have been provided with the following information for Division Sell of a decentralized company:

Division Buy would like to purchase all of its units internally. Division Buy needs 6,000 units each period
and currently pays $84 per unit to an outside firm. What is the lowest price that Division Sell could accept
from Division Buy? Assume that Division Buy wants to use a sole supplier and will not purchase less than
6,000 from a supplier.

A. $90.
B. $84.
C. $80.
D. $66.
E. $40.
85. Given the following data for Division M:

Division T would like to purchase 15,000 units each period from Division M. Division M has ample excess
capacity to handle all of Division T's needs. Division T now purchases from an outside supplier at a price
of $40. If Division M refuses to accept an $18 price internally, the company, as a whole, will be worse off
by

A. $60,000.
B. $150,000.
C. $180,000.
D. $240,000.
E. $290,000.
86. Baldwin Corp. manufactures RD34 in its Webb Division. This output is sold to the Roberts Division as raw
material in Robert's product. Webb also further processes the RD34 into RD35, and then sells it to other
companies.
The Webb Division's variable costs for the basic ingredient are $15 per unit. The Robert Division's variable
costs are $5 per unit in addition to what it pays the Webb Division. The Roberts 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 Webb 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 Webb Division should be willing to transfer RD34 to the Roberts Division,
assuming the Webb Division is not at full capacity?
b. What is the lowest price the Webb Division should be willing to transfer RD34 to the Roberts Division,
assuming the Webb Division is at full capacity?
c. Ignore parts (a) and (b). Assume that the Webb Division has a capacity of 500,000 units, but can only
sell 300,000 on the open market. How many units should the Webb Division sell externally and how many
units should it sell to Roberts Division at a transfer price of $20?
87. Dock Industries is a decentralized company that evaluates its divisions based on ROI. The Wilson Division
has the capacity to produce 2,000 units of a component. The Wilson Division's variable costs are $85 per
unit; fixed costs are $70 per unit.
The Becker Division can use the product as a component in one of its products. The Becker Division would
incur $65 of variable costs to convert the component into its own product which sells for $310.
Required (consider each question independent of each other):
a. Assume the Wilson Division can sell all that it produces for $185 each. The Becker Division needs 100
units. What is the appropriate transfer price?
b. Assume the Wilson Division can sell 1,800 units at $265. Any excess capacity will be unused unless the
units are purchased by the Becker Division (which can use up to 100 units). What are the minimum and
maximum transfer prices?

88. Howard Company operates several investment centers. The manager of Genco Division expects the
following results for the coming year.

Included in Genco's variable cost is $7 for a component it buys from an outside supplier. One of these
components is required in each unit of Genco's product. The manager of Genco has just found that she can
buy the component from Danner Division, another division of Howard Company. Danner sells 300,000
units of the component to outsiders at $8 and its variable cost is $4 per unit. Danner offers to sell the
component to Genco at a price of $6. Danner is operating well below capacity
Required
a. If Genco accepts the offer, what will happen to the income of Danner Division?
b. If Genco accepts the offer, what will happen to the income of Genco Division?
c. If Genco accepts the offer, what will happen to the income of Howard Company?
89. Howard Company operates several investment centers. The manager of Genco Division expects the
following results for the coming year.

Included in Genco's variable cost is $7 for a component it buys from an outside supplier. One of these
components is required in each unit of Genco's product. The manager of Genco has just found that she can
buy the component from Danner Division, another division of Howard Company. Danner sells 300,000
units of the component to outsiders at $8 and its variable cost is $4 per unit. Danner offers to sell the
component to Genco at a price of $6.
Danner has a capacity of 330,000 units. Assume that Genco wants to buy all of its needs from one source,
so that Danner must supply all or none of Genco's need for 50,000 units.
Required
a. Determine the change in income of Danner Division of supplying the component to Genco at $6 as
opposed to not supplying Genco.
b. Determine the change in income of Howard Company if Danner supplies Genco at $6.

90. Bayfield Division of Ashland Inc. has a capacity of 200,000 units and expects the following results.

Washburn Division of Ashland Inc. currently purchases 50,000 units of a part for one of its products
from an outside supplier for $4 per unit. Washburn's manager believes he could use a minor variation of
Bayfield's product instead, and offers to buy the units from Bayfield at $3.50. Making the variation desired
by Washburn would cost Bayfield an additional $0.50 per unit and would increase Bayfield's annual cash
fixed costs by $20,000. Bayfield's manager agrees to the deal offered by Washburn's manager.
a. What is the effect of the deal on Washburn's income?
b. What is the effect of the deal on Bayfield's income?
c. What is the effect of the deal on the income of Ashland Inc. as a whole?
91. Division A of Stills Company expects the following results

Division B has the opportunity to buy its needs of 5,000 units from an outside supplier at $45 each.
Required: Answer 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 Stills.
b. Division A cannot increase its sales to outsiders, does meet the $45 price, and Division B continues to
buy from A. Compute the effect on the income of Stills.

92. Rosy Division of Acme Inc. has a capacity of 100,000 units and expects the following results for the year.

Amy Division of Acme Inc. currently purchases 20,000 units of a part for one of its products from an
outside supplier at $32 per unit. Amy's manager believes she could use a minor variation of Rosy's product
instead, and offers to buy the units from Rosy at $26. Making the variation desired by Amy would cost
Rosy an additional $5 per unit and would increase Rosy's annual cash fixed costs by $80,000. Rosy's
manager agrees to the deal offered by Amy's manager.
Required:
a. Find the effect of the deal on Amy's income
b. Find the effect of the deal on Rosy's income.
c. Find the effect of the deal on the income of Acme Inc. as a whole.
93. Division A of Stills Company expects the following results:

Division B has the opportunity to buy its needs of 5,000 units 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 Stills allows the divisional managers to negotiate transfer prices. What would the maximum
transfer price be?
c. Assume that Stills allows the divisional managers to negotiate transfer prices. What would the minimum
transfer price be?

94. Woodville Industries evaluates its divisions based on residual income. The Hilton Division has the capacity
to produce 20,000 units of a component. The Hilton Division's variable costs are $150 per unit; fixed costs
are $110 per unit.
The Sutton Division can use the product as a component in one of its products. The Sutton Division would
incur $75 of variable costs to convert the component into its own product which sells for $300.
Required (consider each question independent of each other):
a. Assume the Hilton Division can sell all that it produces for $285 each. The Sutton Division needs 1,000
units. What is the appropriate transfer price?
b. Assume the Hilton Division can sell 18,000 units at $285. Any excess capacity will be unused unless the
units are purchased by the Sutton Division (which can use up to 1,000 units). What are the minimum and
maximum transfer prices?
95. Toledo Shipping, Inc., operates two divisions: (1) a shipping division that owns and manages bulk carriers
on the Great Lakes and (2) a repair division that operates a dry dock in Port Huron, Michigan. The repair
division works on company ships, as well as other large-hull ships.
The repair division has an estimated variable cost of $45 per labor-hour. The repair division has a backlog
of work for outside ships. They charge $125 per hour for labor & overhead, which is standard for this type
of work. The management 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 shipping division should pay?
c. If the repair division had idle capacity, what is the minimum transfer price that the repair division should
obtain?

96. Stearns 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?
97. Stills Company expects the following results:

Included in Division A's costs are 10,000 units of a subcomponent purchased from an outside supplier for
$45. The managers have recently initiated negotiations for Division B to supply the components to Division
A. Division B has a total capacity of 40,000 units.
Required:
a. Would Stills Company prefer the subcomponent used by A to be purchased internally from B or from the
outside vendor?
b. What would be the maximum and minimum transfer prices?

98. Stills Company expects the following results:

Included in Division A's costs are 10,000 units of a subcomponent purchased from an outside supplier for
$45. The managers have recently initiated negotiations for Division B to supply the components to Division
A. Division B has a total capacity of 40,000 units.
Required:
a. Prepare a new segment reporting statement for Stills, assuming an internal transfer at the maximum
transfer price.
a. Prepare a new segment reporting statement for Stills, assuming an internal transfer at the minimum
transfer price.
99. Ryman Company has two divisions organized as profit centers: Redmon and Tomlin. Ryman expects the
following results:

Included in Redmon's costs are 100,000 units of a subcomponent purchased from an outside supplier for
$4.50. The managers have recently initiated negotiations for Tomlin to supply the components to Redmon.
Tomlin has a total capacity of 400,000 units.
Required:
a. Would Ryman Company prefer the subcomponent used by Redmon to be purchased internally from
Tomlin or from the outside vendor? What would be the profit impact?
b. What would be the maximum and minimum transfer prices?
100.Ryman Company has two divisions organized as profit centers: Redmon and Tomlin. Ryman expects the
following results:

Included in Redmon's costs are 100,000 units of a subcomponent purchased from an outside supplier for
$4.50. The managers have recently initiated negotiations for Tomlin to supply the components to Redmon.
Tomlin has a total capacity of 400,000 units.
Required:
a. Prepare a new segment reporting statement for Ryman, assuming an internal transfer at the maximum
transfer price.
a. Prepare a new segment reporting statement for Ryman, assuming an internal transfer at the minimum
transfer price.
101.Meredith Motor Works has just acquired a new Battery Division. The Battery Division produces a standard
12volt battery that it sells to retail outlets at a competitive price of $20. The retail outlets purchase about
800,000 batteries a year. Since the Battery Division has a capacity of 1,000,000 batteries a year, top
management is thinking that it might be wise for the company's Automotive Division to start purchasing
batteries from the newly acquired Battery Division.
The Automotive Division now purchases 300,000 batteries a year from an outside supplier, at a price of
$18 per battery. The discount from the competitive $20 price is a result of the large quantity purchased.
The Battery Division's cost per battery is shown below:

Fixed costs are based on 1,000,000 batteries.

Both divisions are to be treated as investment centers, and their performance is to be evaluated by the ROI
formula.
Required:
a. What transfer price would you recommend and why?
b. What transfer price would you recommend if the Battery Division is now selling 1,000,000 batteries a
year to retail outlets?
c. Suppose the manager of the Battery Division can increase its capacity to 1,500,000 units for $1,200,000.
She then has the option of (a) cutting the retail price to $17.50 with the certainty that sales will increase to
1,500,000 batteries, or (b) maintaining the outside price of $20.00 for the 800,000 batteries and transferring
the 300,000 batteries to the Automotive Division at some price that would produce the same income for the
Battery Division as option (a). What is the minimum transfer price you would recommend in this situation?
102.Metalbinders, Inc., has two divisions for its metal fabrication business. Division A stamps the objects and
then transfers them to Division B, which finishes and sells them. Last year, Division A had administrative
expenses of $40,000. Division B incurred additional production costs of $120,000 (exclusive of amounts
paid to Division A for the stamped steel) to process 120,000 units. Division B sold the finished goods for
$500,000 and incurred $80,000 in variable selling and administrative expenses.
Required:
a. Prepare income statements for each division. Use a transfer price of Division A's total cost plus 5%.
Assume Cost of Goods Sold for Division B is $351,000.
b. Repeat (a), using a transfer price of $2.00 per unit; this is also the market price.
c. Repeat (a), using a negotiated transfer price of $1.90 per unit.
d. Which transfer price results in higher income to Metalbinders, Inc.?

103.Division S sells its product to unrelated parties at a price of $20 per unit. It incurs variable costs of $7 per
unit and has fixed costs of $50,000 per month. Monthly production is generally 10,000 units.
Division B uses Division S's product in its operations. It can purchase the units from Division S at $20 per
unit, but must pay a $1.50 per unit in shipping costs. Alternatively, Division B can buy from Division S's
competition at a delivered price of $21 per unit.
Required:
a. From the company's perspective, should Division B purchase the units internally or externally? Assume
Division S has ample capacity to handle all of Division B's needs.
b. Would your answer change if Division S can sell everything it produces to outside customers?
104.Roberts Machinery Company manufactures heavy-duty equipment used in foundries, mining operations,
and similar operations. The company is very decentralized, with various division managers having control
over capital investments and most production decisions. The Cylinder Division fabricates a component
which is used by the Press Division in its production of metal presses. The Cylinder Division has been
selling to the Press Division at a price of $3,000 per unit. Because of a cost increase, the Cylinder Division
wants to increase its price to $3,200, even though the Press Division can still purchase an equivalent
component externally for $3,000. The following information has been gathered regarding this issue:

Required:
a. If the Press Division buys its units externally, the Cylinder Division will have idle capacity for which
there are no alternative uses. Will the company as whole benefit if the Press Division purchases its units
externally for $3,000 per unit?
b. If the Press Division buys its units externally, the Cylinder Division will have idle capacity which can be
used to generate a positive cash flow of $40,000. Will the company as whole benefit if the Press Division
purchases its units externally for $3,000 per unit?
c. Refer to (b). Will your answer change if the price at which the Press Division can buy externally
decreases to $2,700 per unit? Support your answer.
105.The ABC Manufacturing Company has a division (P Division) that produces an essential ingredient used by
the Lawn Division in making lawn fertilizer. Historically, 75% of Division P's output has been purchased
by Division L and 25% has been sold to other fertilizer companies. The transfer price between Division P
and Division L has been based on the outside sales price less selling and administrative expenses directly
applicable to the outside sales. Last year, the transfer price was $35 per ton; Division P would like the same
transfer price this year. However, the general manager of Division L has found an outside supplier who
will sell the ingredient for $30 per ton. She would like to continue buying from Division P, but Division
P's manager does not want to match the $30 price because he thinks that the margin is too small. Top
management does not get involved in transfer pricing disputes, but rather, allows division managers to
make their own decisions concerning internal or external purchases and sales.
The following information has been gathered regarding Division P's operations last year:

The information presented above is based on selling 120,000 tons internally and 40,000 tons externally.
Required:
a. If Division L buys externally, Division P can increase its current external sales by only 20,000 tons.
What arguments can the general manager of Division L make to help Division P to match the $30 price?
b. Division L wants to use only one supplier so Division P will either sell 120,000 tons to Division L or
nothing. If Division L's capacity is 160,000 tons, how many units does Division P need to sell to outsiders
at $50 per ton before it is better off selling to outsiders? Ignore any additional marketing costs which would
be incurred to increase sales.

106.Why is transfer pricing only a concern for profit or investment centers and not for cost or revenue centers?
107.Explain the general principle for determining the optimal transfer price.

108.What is meant by a dual transfer pricing system? What are some advantages and disadvantages of it?

109.What are the limitations of market-based transfer prices?

110.What are the advantages and disadvantages of using a negotiated transfer price?
 ch15 Key
1. A transfer price is the value assigned to the transfer of goods or services between divisions within the
same organization.

TRUE
This is the definition of transfer pricing.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Easy
Lanen - Chapter 15 #1
Learning Objective: 1
Topic Area: What Is Transfer Pricing and Why Is It Important?

2. Transfer prices are not used to record the exchange between two cost centers within the same
organization.

TRUE
Transfer prices are used for profit and investment centers. Cost centers are not concerned with profits.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Medium
Lanen - Chapter 15 #2
Learning Objective: 1
Topic Area: What Is Transfer Pricing and Why Is It Important?

3. Transfer prices cannot be used for decision making, product costing, or performance evaluation.

FALSE
Transfer pricing is used in decision making, product costing, and performance evaluation.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Easy
Lanen - Chapter 15 #3
Learning Objective: 1
Topic Area: What Is Transfer Pricing and Why Is It Important?

4. From an organization's viewpoint, transfer prices have no effect on total profits assuming the transfer
occurs between the two responsibility centers.

TRUE
Total profits are unaffected, divisional profits will have effects but they off-set.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Medium
Lanen - Chapter 15 #4
Learning Objective: 1
Topic Area: What Is Transfer Pricing and Why Is It Important?
5. If a transfer has no effect on divisional profit, risk-neutral managers will be indifferent between making
the transfer or not.

TRUE
Since there is no effect on profit, there is no risk.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Medium
Lanen - Chapter 15 #5
Learning Objective: 2
Topic Area: Determining the Optimal Transfer Price

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.

TRUE
Since the divisions are prohibited, the outside price is irrelevant.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Medium
Lanen - Chapter 15 #6
Learning Objective: 2
Topic Area: Determining the Optimal Transfer Price

7. A perfect intermediate market exists if buyers can buy and sellers can sell outside of the organization.

FALSE
A perfect market exists when buyers and sellers can have unlimited transactions with no impact on
prices.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Medium
Lanen - Chapter 15 #7
Learning Objective: 2
Topic Area: Determining the Optimal Transfer Price

8. When a perfect intermediate market exists, the optimal transfer price is the intermediate market price.

TRUE
In a perfect market, the market price is optimal.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Easy
Lanen - Chapter 15 #8
Learning Objective: 2
Topic Area: Determining the Optimal Transfer 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.

FALSE
It is the opportunity cost of the resource at the point of the transfer. Normally this is the lost contribution
by not selling outside.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Hard
Lanen - Chapter 15 #9
Learning Objective: 2
Topic Area: Optimal Transfer Price: A General Principle

10. The use of an optimal transfer price eliminates potential conflicts between an organization's interests
and the divisional manager's interest.

FALSE
Conflicts may be reduced, but will not be eliminated.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Easy
Lanen - Chapter 15 #10
Learning Objective: 3
Topic Area: How to Help Managers Achieve Their Goals While Achieving the Organizations Goals

11. A market price-based transfer price policy allows the selling division to determine the price for transfers
between divisions within the same organization.

FALSE
The market determines the price, not the division.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Easy
Lanen - Chapter 15 #11
Learning Objective: 3
Topic Area: Establishing a Market Price Policy

12. A selling division at capacity is indifferent between selling to outsiders and transferring inside at the
market price.

TRUE
The profit would be the same in either case.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Easy
Lanen - Chapter 15 #12
Learning Objective: 3
Topic Area: Establishing a Market Price Policy
13. When actual costs are used as the basis for a transfer, inefficiencies of the selling division are
transferred to the buying division.

TRUE
The selling division has no incentive to minimize the inefficiencies since they can all be passed on.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Easy
Lanen - Chapter 15 #13
Learning Objective: 3
Topic Area: Establishing a Cost-Basis Policy

14. A transfer made at cost does not motivate the selling division to transfer its goods or services internally.

TRUE
There is no profit for the selling division.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Easy
Lanen - Chapter 15 #14
Learning Objective: 3
Topic Area: Establishing a Cost-Basis Policy

15. In general, negotiated transfer prices fall in a range between the selling division's differential costs and
the buying division's market price.

TRUE
The seller's differential costs are the lowest the seller would accept; the buyer's market price is the
highest the buy would be willing to pay.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Medium
Lanen - Chapter 15 #15
Learning Objective: 3
Topic Area: Negotiating the Transfer Price

16. In the United States, more companies use cost-based transfer prices than market-based transfer prices.

TRUE
Numerous surveys have shown this to be true.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Knowledge
Difficulty: Easy
Lanen - Chapter 15 #16
Learning Objective: 4
Topic Area: Global Practices
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.

TRUE
The transfers can in effect move profits from one jurisdiction to another.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Medium
Lanen - Chapter 15 #17
Learning Objective: 4
Topic Area: Multinational Transfer Pricing

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.

TRUE
The key is "inflated" prices. Market based prices would not be unethical.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Easy
Lanen - Chapter 15 #18
Learning Objective: 4
Topic Area: Multinational Transfer Pricing

19. An organization that has significant foreign operations must disclose how its transfer prices are
established between domestic and foreign divisions.

TRUE
This is a requirement of GAAP.

AACSB: Analytic
AICPA: FN-Measurement
Blooms: Comprehension
Difficulty: Easy
Lanen - Chapter 15 #19
Learning Objective: 5
Topic Area: Segment Reporting

20. The GAAP financial reporting rules for segments require that all companies use transfer prices based on
market prices.

FALSE
GAAP does not specify what method must be used for transfer pricing except for the oil and gas
industry.

AACSB: Analytic
AICPA: FN-Measurement
Blooms: Comprehension
Difficulty: Easy
Lanen - Chapter 15 #20
Learning Objective: 5
Topic Area: Segment Reporting
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.

A. Only A is false.
B. Only B is false.
C. Both A and B are false.
D. Neither A nor B is false.

Transfer prices do not affect total profits, (B) is the definition of transfer price.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Easy
Lanen - Chapter 15 #21
Learning Objective: 1
Topic Area: What Is Transfer Pricing and Why Is It Important?

22. Which of the following responsibility centers is affected by the use of market-based transfer prices?

A. cost center.
B. profit center.
C. revenue center.
D. production center.

Transfer prices affect only profit or investment centers.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Easy
Lanen - Chapter 15 #22
Learning Objective: 1
Topic Area: What Is Transfer Pricing and Why Is It Important?

23. Transfer prices would not be used by

A. production centers.
B. investment centers.
C. profit centers.
D. cost centers.

Cost centers are not responsible for profits and don't have transfer pricing issues.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Easy
Lanen - Chapter 15 #23
Learning Objective: 1
Topic Area: What Is Transfer Pricing and Why Is It Important?
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.

A. Only A is true.
B. Only B is true.
C. Both A and B are true.
D. Neither A nor B is true.

Both are true statements.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Medium
Lanen - Chapter 15 #24
Learning Objective: 2
Topic Area: Determining the Optimal Transfer Price

25. In general, if a potential transfer has no effect on divisional profits,

A. no transfer will take place between the divisions.

B. managers will be indifferent between making the transfer or not.
C. the organization should not intervene to force a transfer.
D. the optimal transfer price is the opportunity cost for the buying division.

Manager's are motivated by the profits of their division. If there is no effect, managers will be
indifferent.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Medium
Lanen - Chapter 15 #25
Learning Objective: 2
Topic Area: Determining the Optimal Transfer Price

26. An intermediate market is perfect when

A. there is no quality differences between inside and outside suppliers.

B. there is no quality differences between inside and outside customers.
C. buyers and sellers can sell any quantity without affecting the market price.
D. buyers and sellers are motivated to make decisions that are consistent with those of the organization.

This is the definition of a perfect market.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Easy
Lanen - Chapter 15 #26
Learning Objective: 2
Topic Area: Determining the Optimal Transfer Price
27. When there is no intermediate market,

A. there is no optimal transfer price.

B. the selling division cannot transfer its goods internally.
C. the buying division cannot purchase its goods externally.
D. there is no reason for top management to intervene in transfer pricing disputes.

The intermediate market is an external market for the good.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Medium
Lanen - Chapter 15 #27
Learning Objective: 2
Topic Area: Determining the Optimal Transfer Price

28. The general principle on setting transfer prices that are in the organization's best interests is:

A. outlay cost plus opportunity cost of the resource at the point of transfer.
B. variable costs plus opportunity cost of the resource at the point of transfer.
C. lost contribution margin less the allocated fixed costs for the selling division.
D. gross margin for the buying division plus the gross margin for the selling division.

Incremental fixed costs may also occur and would be included in outlay costs.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Easy
Lanen - Chapter 15 #28
Learning Objective: 2
Topic Area: Optimal Transfer Price: A General Principle

29. The optimal transfer price when there are intermediate markets is

A. full cost.
B. outlay costs.
C. variable cost.
D. market prices.
E. negotiated market prices.

If markets exist the market price is the optimal transfer price.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Easy
Lanen - Chapter 15 #29
Learning Objective: 2
Topic Area: Optimal Transfer Price: A General Principle
30. Which of the following is not an appropriate use of transfer pricing?

A. product costing
B. decision making
C. establishing standards
D. evaluating performance

Transfer prices do not affect standard costs.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Easy
Lanen - Chapter 15 #30
Learning Objective: 3
Topic Area: How to Help Managers Achieve Their Goals While Achieving the Organizations Goals

31. An internal transfer between two divisions is in the best economic interest 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 prices for the buying division.

If the variable cost plus opportunity cost is less than the external price the company will show a higher
profit.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Easy
Lanen - Chapter 15 #31
Learning Objective: 3
Topic Area: How to Help Managers Achieve Their Goals While Achieving the Organizations Goals

32. Top management intervention in settling transfer pricing disputes between two divisions should be
avoided unless

A. there is no intermediate markets.

B. the intermediate market is imperfect.
C. there is an extraordinarily large order.
D. there is no opportunity costs.

Intervention removes authority from the decentralized units.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Easy
Lanen - Chapter 15 #32
Learning Objective: 3
Topic Area: Top-Management Intervention in Transfer Pricing
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

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.

If there is an open market, that price should be used.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Easy
Lanen - Chapter 15 #33
Learning Objective: 3
Topic Area: Top-Management Intervention in Transfer Pricing

34. If the selling division has excess capacity, the transfer price should be set at its

A. differential outlay costs.

B. differential outlay costs plus the foregone contribution to the organization of making the transfer
internally.
C. selling price less the variable costs.
D. selling price less the variable costs plus the foregone contribution to the organization of making the
transfer internally.

The opportunity cost would be zero.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Medium
Lanen - Chapter 15 #34
Learning Objective: 2
Topic Area: Optimal Transfer Price: A General Principle

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

A. full cost.
B. direct cost.
C. variable cost.
D. standard cost.
E. absorption cost.

A standard cost will not pass along inefficiencies.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Easy
Lanen - Chapter 15 #35
Learning Objective: 3
Topic Area: Establishing a Cost-Basis Policy
36. 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.

The goal is to approximate market prices.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Easy
Lanen - Chapter 15 #36
Learning Objective: 3
Topic Area: Establishing a Cost-Basis Policy

37. Given a competitive outside market for identical intermediate goods, what is the BEST transfer price,
assuming all relevant information is readily available?

A. standard production cost per unit.

B. market price of the intermediate goods.
C. actual full cost per unit plus a normal markup.
D. market price of the final goods less any opportunity costs.

The best price is the market price if it exists.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Easy
Lanen - Chapter 15 #37
Learning Objective: 2
Topic Area: Applying the General Principle

38. 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.

Taxes are avoided when profits are reduced in a high tax country (and by extension profits would be
higher in a low tax country).

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Medium
Lanen - Chapter 15 #38
Learning Objective: 4
Topic Area: Multinational Transfer Pricing
39. 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.

This is a GAAP requirement.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Easy
Lanen - Chapter 15 #39
Learning Objective: 5
Topic Area: Segment Reporting

40. A division can sell externally for $40 per unit. Its variable manufacturing costs are $15 per unit, and
its variable marketing costs are $6 per unit. What is the opportunity cost of transferring internally,
assuming the division is operating at capacity?

A. $15
B. $19
C. $21
D. $25

($40 - $15 - $6) = $19

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Easy
Lanen - Chapter 15 #40
Learning Objective: 2
Topic Area: Applying the General Principle

41. Division A has variable manufacturing costs of $25 per unit and fixed costs of $5 per unit. Division A is
operating at capacity, what is the opportunity cost of an internal transfer when the market price is $35?

A. $5
B. $10
C. $25
D. $30
E. $35

$35 - $25 = $10

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Easy
Lanen - Chapter 15 #41
Learning Objective: 2
Topic Area: Applying the General Principle
42. Chipper Division of Acme Corp. 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. Chipper has a capacity to produce
100,000 units per period. Jones Division currently purchases 10,000 units of part Z-25 from Chipper for
$40. Jones has been approached by an outside supplier willing to supply the parts for $36. What is the
effect on Acme's overall profit if Chipper REFUSES the outside price and Jones decides to buy outside?

A. no change
B. $140,000 decrease in Acme profits
C. $80,000 decrease in Acme profits
D. $40,000 increase in Acme profits

($36 - $22) × 10,000 = $140,000 decrease in profits

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Easy
Lanen - Chapter 15 #42
Learning Objective: 2
Topic Area: Applying the General Principle

43. Chipper Division of Acme Corp. 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. Chipper has a capacity to produce
100,000 units per period. Jones Division currently purchases 10,000 units of part Z-25 from Chipper
for $40. Jones has been approached by an outside supplier willing to supply the parts for $36. What is
the effect on Acme's overall profit if Chipper ACCEPTS the outside price and Jones continues to buy
inside?

A. no change
B. $140,000 decrease in Acme profits
C. $80,000 decrease in Acme profits
D. $40,000 increase in Acme profits

No change since costs have not changed for Chipper Division.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Easy
Lanen - Chapter 15 #43
Learning Objective: 2
Topic Area: Applying the General Principle
44. Chipper Division of Acme Corp. 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. Chipper has a capacity to produce
100,000 units per period. Jones Division currently purchases 10,000 units of part Z-25 from Chipper for
$40. Jones has been approached by an outside supplier willing to supply the parts for $36. If Acme 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

Maximum price is the outside market price for the buying division: $36

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Medium
Lanen - Chapter 15 #44
Learning Objective: 3
Topic Area: Negotiating the Transfer Price

45. Chipper Division of Acme Corp. 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. Chipper has a capacity to produce
100,000 units per period. Jones Division currently purchases 10,000 units of part Z-25 from Chipper for
$40. Jones has been approached by an outside supplier willing to supply the parts for $36. If Acme 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

Minimum price is the outlay cost plus any opportunity costs: $22

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Medium
Lanen - Chapter 15 #45
Learning Objective: 3
Topic Area: Negotiating the Transfer Price
46. Redimix Corporation has two producing centers, (A and B) Division A has a variable cost of $12
for its products and a total fixed cost of $120,000. Division A also has idle capacity for up to 50,000
units per month. Division B would like to purchase 20,000 units of Division A's products per month,
but is unable to convince Division A to transfer units to Division B at $16 per unit. Division A has
consistently argued that the market price of $20 is nonnegotiable. What is A's opportunity cost of not
transferring units to B?

A. $20
B. $12
C. $8
D. $4

$16 - $12 = $4

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Easy
Lanen - Chapter 15 #46
Learning Objective: 2
Topic Area: Applying the General Principle

47. You have been provided with the following information for Division X of a decentralized company:

Division W would like to purchase all of its units internally. Division W needs 6,000 units each period
and currently pays $42 per unit to an outside firm. What is the lowest price that Division X could accept
from Division W? Assume that Division W wants to use a sole supplier and will not purchase less than
6,000 from a supplier.

A. $45.
B. $42.
C. $40.
D. $38.
E. $33.

[$33(2,500) + $45(3,500)]/6,000 = $40

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Hard
Lanen - Chapter 15 #47
Learning Objective: 2
Topic Area: Applying the General Principle
48. Given the following data for Division X:

Division Y would like to purchase 15,000 units each period from Division X. Division X has ample
excess capacity to handle all of Division Y's needs. Division Y now purchases from an outside supplier
at a price of $20. If Division X 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.
E. $195,000.

($20 - 12) × 15,000 = $120,000

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Easy
Lanen - Chapter 15 #48
Learning Objective: 2
Topic Area: Applying the General Principle

49. Given the following data for Division A:

Assume that Division A is selling all it can produce to outside customers. If it sells to Division B, $1
can be avoided in variable cost per unit. Division B 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 Division B should be
priced at

A. $40.
B. $39.
C. $38.
D. $37.
E. The company would not want the transfer to take place.

The company as a whole would lose if the transfer was made. It is better off to buy from outside at $38
and to sell outside at $40. The $1 savings is not enough to make up this differential.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Hard
Lanen - Chapter 15 #49
Learning Objective: 2
Topic Area: Determining the Optimal Transfer Price
50. Given the following data for Division L:

Division N would like to purchase 10,000 units from Division L at a price of $125 per unit. Division
L has no excess capacity to handle Division N's requirements. Division N currently purchases from
an outside supplier at a price of $140. If Division L 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

($150 - 140) × 10,000 = ($100,000)

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Medium
Lanen - Chapter 15 #50
Learning Objective: 2
Topic Area: Determining the Optimal Transfer Price

Avery Corporation has two divisions, A and B, which are both organized as profit centers; Division A
produces and sells widgets to Division B and to outside customers. Division A has total costs of $35,
$20 of which are variable. Division A is operating significantly below capacity and sells the widgets for
$50.
Division B has received an offer from an outsider vendor to supply all the widgets it needs (20,000
widgets) at a cost of $45. The manager of Division B is considering the offer but wants to approach
Division A first.
Lanen - Chapter 15

51. What would be the profit impact to Avery Corporation as a whole if Division B purchased the 20,000
widgets it needs from the outside vendor for $45?

A. no change in profit to Avery

B. $100,000 increase in profits
C. $100,000 decrease in profits
D. $500,000 decrease in profits

Outside price $45 - Selling division's variable costs $20 = $25 higher costs × 20,000 units = $500,000
increase in costs which leads to a $500,000 decrease in profits

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Easy
Lanen - Chapter 15 #51
Learning Objective: 2
Topic Area: Determining the Optimal Transfer Price
52. What is the minimum transfer price from Division A to Division B?

A. $20
B. $35
C. $45
D. $50

Selling division's variable costs = $20

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Easy
Lanen - Chapter 15 #52
Learning Objective: 2
Topic Area: Determining the Optimal Transfer Price

53. What is the maximum transfer price from Division A to Division B?

A. $20
B. $35
C. $45
D. $50

Maximum price would be the market price the buyer would pay: $45

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Medium
Lanen - Chapter 15 #53
Learning Objective: 2
Topic Area: Determining the Optimal Transfer Price

Cruises, Inc., operates two divisions: (1) a management division that owns and manages cruise ships in
the Florida Keys and (2) a repair division that operates a dry dock in Marble Sand Florida. The repair
division works on company ships, as well as other large-hull ships.
The repair division has an estimated variable cost of $28.50 per labor-hour. The repair division has a
backlog of work for outside ships. 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.
Lanen - Chapter 15
54. 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. $46.50
E. $48.00

When at capacity, the market price of $48 is the appropriate transfer price.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Easy
Lanen - Chapter 15 #54
Learning Objective: 2
Topic Area: Applying the General Principle

55. 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
E. $48.00

$30, what management division can purchase from outside

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Easy
Lanen - Chapter 15 #55
Learning Objective: 2
Topic Area: Applying the General Principle

56. 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
E. $48.00

The selling division's variable cost of $28.50 is the appropriate transfer price.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Easy
Lanen - Chapter 15 #56
Learning Objective: 2
Topic Area: Applying the General Principle
Flowers and Flowers, Inc., has two divisions. Division A has an investment base of $750,000 and
produces (and sells) 100,000 units of Eyne at a market price of $10.00 per unit. Variable costs total
$3.50 per unit, and fixed charges are $4.00 per unit (based on a capacity of 120,000 units). Division B
wants to purchase 25,000 units of Eyne from Division A. However, Division B is only willing to pay
$6.75 per unit.
Lanen - Chapter 15

57. What is the contribution margin for Division A without the transfer to Division B?

A. $250,000
B. $650,000
C. $675,000
D. $1,000,000

100,000 units × ($10 - $3.50) = $650,000

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Medium
Lanen - Chapter 15 #57
Learning Objective: 2
Topic Area: Applying the General Principle

58. What is the contribution margin for Division A if it transfers 25,000 units to Division B at $6.75 per
unit?

A. $250,000
B. $650,000
C. $675,000
D. $698,750

(95,000 × $6.50) + [25,000 × ($6.75 - $3.50)] = $698,750

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Medium
Lanen - Chapter 15 #58
Learning Objective: 2
Topic Area: Applying the General Principle
59. What is the minimum transfer price for the 25,000 unit order that Division A would accept if it wishes
to maintain its pre-order contribution?

A. $3.50
B. $4.00
C. $4.80
D. $6.00

opportunity cost = 5,000 × $6.50 = $32,500; transfer price: $3.50 + (32,500/25,000) = $4.80

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Medium
Lanen - Chapter 15 #59
Learning Objective: 2
Topic Area: Applying the General Principle

60. A company is highly centralized. Division X, 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. Division
Y would like to purchase this component from Division X. The price that Division X should charge
Division Y per unit for this component is

A. $7.
B. $11.
C. $13.
D. $15.

Since Division X is at full capacity, the appropriate transfer price is its market price.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Easy
Lanen - Chapter 15 #60
Learning Objective: 2
Topic Area: Applying the General Principle
61. A company has two divisions, A and B, each operated as a profit center. Division A charges Division B
$35 per unit (for each unit transferred to Division B). Other data for Division A are as follows:

Division A is planning to raise its transfer price to $50 per unit. Division B can purchase units at $40
per unit from outsiders, but doing so would idle Division A's facilities (now committed to producing
units for Division B), Division A cannot increase its sales to outsiders. From the perspective of the
company as a whole, from who should Division B acquire the units, assuming Division B's market is
unaffected?

A. Outside vendors.
B. Division A, but only at the variable cost per unit.
C. Division A, but only until fixed costs are covered, then should purchase from outside vendors.
D. Division A, in spite of the increased transfer price.

The company as a whole only pays the $30 variable cost which is less than the $40 outside price. The
overall company would like an internal transfer.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Easy
Lanen - Chapter 15 #61
Learning Objective: 2
Topic Area: Applying the General Principle

Cohasset Company currently manufactures all component parts used in the manufacture of various hand
tools. Hurley Division produces a steel handle used in three different tools. The budget for these handles
is 120,000 units with the following unit cost.

Ironwood Division purchases 20,000 handles from Hurley Division and completes the hand tools. An
outside supplier, R & M Steel, has offered to supply 20,000 units of the handle to Ironwood Division for
$1.25 per unit. Hurley currently has idle capacity that cannot be used.
Lanen - Chapter 15
62. What is the cost impact to Cohasset as a whole of purchasing from R & M Steel? (CMA adapted)

A. increase the handle unit cost by $.05.

B. increase the handle unit cost by $.15.
C. decrease the handle unit cost by $.15.
D. decrease the handle unit cost by $.25.
E. decrease the handle unit cost by $.05.

Make: $.60 + .40 + .10 = $1.10; Buy: $1.25; Differential: Buy $1.25 - Make $1.10 = $0.15 more cost if
buying outside

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Easy
Lanen - Chapter 15 #62
Learning Objective: 2
Topic Area: Applying the General Principle

63. If Cohasset would like to develop a range of transfer prices, what would be the maximum transfer price
that Ironwood would be willing to pay?

A. $1.00
B. $1.10
C. $1.25
D. $1.30

Maximum price would be the market price = $1.25

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Easy
Lanen - Chapter 15 #63
Learning Objective: 3
Topic Area: Negotiating the Transfer Price

64. If Cohasset would like to develop a range of transfer prices, what would be the minimum transfer price
that Hurley would be willing to accept?

A. $1.00
B. $1.10
C. $1.25
D. $1.30

The minimum price would be variable costs plus any opportunity costs: $1.10

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Easy
Lanen - Chapter 15 #64
Learning Objective: 3
Topic Area: Negotiating the Transfer Price
65. Given the following information for Division K:

Division L would like to purchase internally from Division K. Division L now purchases 5,000 units
each period from outside suppliers at $49 per unit. Division K has ample excess capacity to handle all of
Division L's needs. What is the lowest price that Division K could accept?

A. $50.00
B. $49.00
C. $46.00
D. $39.50
E. $30.00

The minimum transfer price is the variable costs of the selling division when the selling division has
excess capacity.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Easy
Lanen - Chapter 15 #65
Learning Objective: 2
Topic Area: Applying the General Principle

66. 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.

There is no motivation for the supplier to work on efficiency since all costs are passed on.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Easy
Lanen - Chapter 15 #66
Learning Objective: 3
Topic Area: Establishing a Cost-Basis Policy
67. 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 the manufacturing
company 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.

Since the market is perfect, market price is the best.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Application
Difficulty: Medium
Lanen - Chapter 15 #67
Learning Objective: 2
Topic Area: Determining the Optimal Transfer Price

68. The Eastern division sells goods internally to the Western division of the same 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. Actual per-ton direct labor is $50. Other actual
costs of storage and handling are $40. The company 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.

$220 = market price of $200 adjusted by the $20 transport cost. Actual cost is $100 + $50 + $40 = $190.
It is not negotiated since the president chose the price.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Application
Difficulty: Easy
Lanen - Chapter 15 #68
Learning Objective: 3
Topic Area: Centrally Established Transfer Price Policies
69. 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.

Cost-based transfer prices pass inefficiencies from the selling division so there is no incentive for
improvement.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Application
Difficulty: Easy
Lanen - Chapter 15 #69
Learning Objective: 3
Topic Area: Establishing a Cost-Basis Policy

70. An appropriate transfer price between two divisions of The Stark Company can be determined from the
following data: (CIA adapted)

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

The minimum is the variable cost, the maximum is the market price.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Hard
Lanen - Chapter 15 #70
Learning Objective: 3
Topic Area: Negotiating the Transfer Price
71. 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)

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

Since it is a perfect market at full capacity, transfer price is the market price: $50,000/1.000 = $50

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Medium
Lanen - Chapter 15 #71
Learning Objective: 2
Topic Area: Applying the General Principle

Parkside Inc. has several divisions that operate as decentralized profit centers. Parkside's Entertainment
Division manufactures video arcade equipment using the products of two of Parkside's other divisions.
The Plastics Division manufactures plastic components, one type that is made exclusively for the
Entertainment Division, while other less complex components are sold to outside markets. The products
of the Video Cards Division are sold in a competitive market; however, one video card model is also
used by the Entertainment Division. The actual costs per unit used by the Entertainment Division are
presented in the next column. (CMA adapted)

The Plastics Division sells its commercial products at full cost plus a 25% markup and believes the
proprietary plastic component made for the Entertainment Division would sell for $6.25 per unit on the
open market. The market price of the video card used by the Entertainment Division is $10.98 per unit.
Lanen - Chapter 15
72. A per-unit transfer price from the Video Cards Division to the Entertainment Division at full cost,
$9.15, would

A. allow evaluation of both divisions on a competitive basis.

B. satisfy the Video Cards Division's profit desire by allowing recovery of opportunity costs.
C. provide no profit incentive for the Video Cards Division to control or reduce costs.
D. encourage the Entertainment Division to purchase video cards from an outside source.

Using full costs passes all costs to the buyer, giving no profit incentive for the seller to watch their
costs.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Medium
Lanen - Chapter 15 #72
Learning Objective: 3
Topic Area: Centrally Established Transfer Price Policies

73. Assume that the Entertainment Division is able to purchase a large quantity of video cards from an
outside source at $8.70 per unit. The Video Cards Division, having excess capacity, agrees to lower its
transfer price to $8.70 per unit. This action would

A. optimize the profit goals of the Entertainment Division while subverting the profit goals of Parkside
Inc.
B. allow evaluation of both divisions on the same basis.
C. subvert the profit goals of the Video Cards Division while optimizing the profit goals of the
Entertainment Division.
D. optimize the overall profit goals of Parkside Inc.

Video's variable cost is $2.40 + $3.00 + $1.50 = $6.90. Since there is excess capacity, the opportunity
cost is zero. Parkside as a whole would save $8.70 - $6.90 = $1.80 per unit.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Medium
Lanen - Chapter 15 #73
Learning Objective: 3
Topic Area: Centrally Established Transfer Price Policies
74. Assume that the Plastics Division has excess capacity and it has negotiated a transfer price of $5.60 per
plastic component with the Entertainment Division. This price will

A. cause the Plastics Division to reduce the number of commercial plastic components it manufactures.
B. motivate both divisions as estimated profits are shared.
C. encourage the Entertainment Division to seek an outside source for plastic components.
D. demotivate the Plastics Division causing mediocre performance.

Entertainment is getting the part cheaper (increasing its profits) and Plastics is making a profit as well.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Medium
Lanen - Chapter 15 #74
Learning Objective: 3
Topic Area: Centrally Established Transfer Price Policies

75. A division can sell externally for $60 per unit. Its variable manufacturing costs are $35 per unit, and
its variable marketing costs are $12 per unit. What is the opportunity cost of transferring internally,
assuming the division is operating at capacity?

A. $13
B. $25
C. $35
D. $47

($60 - $35 - $12) = $13

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Easy
Lanen - Chapter 15 #75
Learning Objective: 2
Topic Area: Applying the General Principle

76. A division can sell externally for $60 per unit. Its variable manufacturing costs are $35 per unit, and its
variable marketing costs are $12 per unit. What is the optimal transfer price for transferring internally,
assuming the division is operating at capacity?

A. $12
B. $35
C. $47
D. $60

operating at capacity: market price = $60

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Easy
Lanen - Chapter 15 #76
Learning Objective: 2
Topic Area: Applying the General Principle
77. Division A has variable manufacturing costs of $50 per unit and fixed costs of $10 per unit. Division
A is operating at capacity, what is the opportunity cost of an internal transfer when the market price is
$75?

A. $20
B. $25
C. $50
D. $60
E. $75

$75 - $50 = $25

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Easy
Lanen - Chapter 15 #77
Learning Objective: 2
Topic Area: Applying the General Principle

78. Division A has variable manufacturing costs of $50 per unit and fixed costs of $10 per unit. Division A
is operating at capacity, what is the optimal transfer price of an internal transfer when the market price
is $75?

A. $20
B. $25
C. $50
D. $60
E. $75

operating at capacity: market price = $75

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Easy
Lanen - Chapter 15 #78
Learning Objective: 2
Topic Area: Applying the General Principle
79. Division A has variable manufacturing costs of $50 per unit and fixed costs of $10 per unit. Division A
is operating significantly below capacity, what is the optimal transfer price of an internal transfer when
the market price is $75?

A. $20
B. $25
C. $50
D. $60
E. $75

below capacity: variable cost = $50

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Easy
Lanen - Chapter 15 #79
Learning Objective: 2
Topic Area: Applying the General Principle

80. Division B has variable manufacturing costs of $50 per unit and fixed costs of $10 per unit. Division B
is operating significantly below capacity, what is the opportunity cost of an internal transfer when the
market price is $75?

A. $0
B. $25
C. $50
D. $60
E. $75

there are no opportunity costs when operating below capacity

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Easy
Lanen - Chapter 15 #80
Learning Objective: 2
Topic Area: Applying the General Principle

Cascade Cliffs, Inc., operates two divisions: (1) a management division that owns and manages bulk
carriers on the Great Lakes and (2) a repair division that operates a dry dock in Cheboygan, Michigan.
The repair division works on company ships, as well as other large-hull ships.
The repair division has an estimated variable cost of $37 per labor-hour. The repair division has a
backlog of work for outside ships. They charge $70.00 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 $45.00 per
hour, including leasing an adequate work area.
Lanen - Chapter 15
81. What is the minimum transfer price per hour that the repair division should obtain for its services,
assuming it is operating at capacity?

A. $33.00
B. $37.00
C. $45.00
D. $70.00
E. $82.00

When at capacity, the market price of $70 is the appropriate transfer price.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Easy
Lanen - Chapter 15 #81
Learning Objective: 2
Topic Area: Applying the General Principle

82. What is the maximum transfer price per hour that the management division should pay?

A. $33.00
B. $37.00
C. $45.00
D. $70.00
E. $82.00

Outside price of $45

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Easy
Lanen - Chapter 15 #82
Learning Objective: 2
Topic Area: Applying the General Principle

83. If the repair division had idle capacity, what is the minimum transfer price that the repair division
should obtain?

A. $33.00
B. $37.00
C. $45.00
D. $70.00
E. $82.00

The selling division's variable cost of $37 is the appropriate transfer price.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Easy
Lanen - Chapter 15 #83
Learning Objective: 2
Topic Area: Applying the General Principle
84. You have been provided with the following information for Division Sell of a decentralized company:

Division Buy would like to purchase all of its units internally. Division Buy needs 6,000 units each
period and currently pays $84 per unit to an outside firm. What is the lowest price that Division Sell
could accept from Division Buy? Assume that Division Buy wants to use a sole supplier and will not
purchase less than 6,000 from a supplier.

A. $90.
B. $84.
C. $80.
D. $66.
E. $40.

[$66(2,500) + $90(3,500)]/6,000 = $80

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Hard
Lanen - Chapter 15 #84
Learning Objective: 2
Topic Area: Applying the General Principle

85. Given the following data for Division M:

Division T would like to purchase 15,000 units each period from Division M. Division M has ample
excess capacity to handle all of Division T's needs. Division T now purchases from an outside supplier
at a price of $40. If Division M refuses to accept an $18 price internally, the company, as a whole, will
be worse off by

A. $60,000.
B. $150,000.
C. $180,000.
D. $240,000.
E. $290,000.

($40 - 24) × 15,000 = $240,000

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Easy
Lanen - Chapter 15 #85
Learning Objective: 2
Topic Area: Applying the General Principle
86. Baldwin Corp. manufactures RD34 in its Webb Division. This output is sold to the Roberts Division as
raw material in Robert's product. Webb also further processes the RD34 into RD35, and then sells it to
other companies.
The Webb Division's variable costs for the basic ingredient are $15 per unit. The Robert Division's
variable costs are $5 per unit in addition to what it pays the Webb Division. The Roberts 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 Webb 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 Webb Division should be willing to transfer RD34 to the Roberts
Division, assuming the Webb Division is not at full capacity?
b. What is the lowest price the Webb Division should be willing to transfer RD34 to the Roberts
Division, assuming the Webb Division is at full capacity?
c. Ignore parts (a) and (b). Assume that the Webb Division has a capacity of 500,000 units, but can only
sell 300,000 on the open market. How many units should the Webb Division sell externally and how
many units should it sell to Roberts Division at a transfer price of $20?

a. Since Webb is operating at less than full capacity, the lowest price is the variable cost of $15.
b. $21
c. outside 300,000; internal 200,000

Feedback: b. opportunity cost: $25 for RD35 - $15 - $4 = $6. Optimal transfer price = outlay cost $15 +
opportunity cost $6 = $21
c. Contribution margin is higher for outside sales $25 - $15 - $4 = $6) than it is for internal ($20 - $15
= $5). Therefore, sell as much outside as possible. open market 300,000 × $6 = $1,800,000; internal
(500,000 - 300,000) = 200,000 × ($20 - $15) = $1,000,000

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Hard
Lanen - Chapter 15 #86
Learning Objective: 2
Topic Area: Determining the Optimal Transfer Price
87. Dock Industries is a decentralized company that evaluates its divisions based on ROI. The Wilson
Division has the capacity to produce 2,000 units of a component. The Wilson Division's variable costs
are $85 per unit; fixed costs are $70 per unit.
The Becker Division can use the product as a component in one of its products. The Becker Division
would incur $65 of variable costs to convert the component into its own product which sells for $310.
Required (consider each question independent of each other):
a. Assume the Wilson Division can sell all that it produces for $185 each. The Becker Division needs
100 units. What is the appropriate transfer price?
b. Assume the Wilson Division can sell 1,800 units at $265. Any excess capacity will be unused unless
the units are purchased by the Becker Division (which can use up to 100 units). What are the minimum
and maximum transfer prices?

a. $185
b. $85 minimum; $245 maximum

Feedback: a. Wilson is at full capacity: market price = $185

b. Wilson is at less than full capacity. Minimum price = variable cost of Wilson = $85; Maximum price
= incoming market price to Becker, but this is unknown. The most Becker will pay is the selling price of
the final product $310 less incremental variable costs of $65 = $245.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Medium
Lanen - Chapter 15 #87
Learning Objective: 2
Topic Area: Applying the General Principle
88. Howard Company operates several investment centers. The manager of Genco Division expects the
following results for the coming year.

Included in Genco's variable cost is $7 for a component it buys from an outside supplier. One of these
components is required in each unit of Genco's product. The manager of Genco has just found that she
can buy the component from Danner Division, another division of Howard Company. Danner sells
300,000 units of the component to outsiders at $8 and its variable cost is $4 per unit. Danner offers to
sell the component to Genco at a price of $6. Danner is operating well below capacity
Required
a. If Genco accepts the offer, what will happen to the income of Danner Division?
b. If Genco accepts the offer, what will happen to the income of Genco Division?
c. If Genco accepts the offer, what will happen to the income of Howard Company?

a. $100,000 increase
b. $50,000 increase
c. $150,000 increase

Feedback: a. 50,000 units × ($6 transfer price - $4 variable cost) = 50,000 × $2 = $100,000 increase in
profit
b. 50,000 units × ($7 old price - $6 new price) = 50,000 × $1 savings = $50,000 increase in profit
c. 50,000 units × ($7 outside price - $4 variable cost) = 50,000 × $3 savings = $150,000 increase

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Medium
Lanen - Chapter 15 #88
Learning Objective: 2
Topic Area: Applying the General Principle
89. Howard Company operates several investment centers. The manager of Genco Division expects the
following results for the coming year.

Included in Genco's variable cost is $7 for a component it buys from an outside supplier. One of these
components is required in each unit of Genco's product. The manager of Genco has just found that she
can buy the component from Danner Division, another division of Howard Company. Danner sells
300,000 units of the component to outsiders at $8 and its variable cost is $4 per unit. Danner offers to
sell the component to Genco at a price of $6.
Danner has a capacity of 330,000 units. Assume that Genco wants to buy all of its needs from one
source, so that Danner must supply all or none of Genco's need for 50,000 units.
Required
a. Determine the change in income of Danner Division of supplying the component to Genco at $6 as
opposed to not supplying Genco.
b. Determine the change in income of Howard Company if Danner supplies Genco at $6.

a. $20,000 increase
b. $70,000 increase

Feedback: a. lost sales [300,000 - (330,000 - 50,000)] × ($8 - $4) = $80,000 opportunity cost; 50,000
units × [$6 - $4] - $80,000 opportunity cost= $20,000 increase in profit
b. 50,000 units × ($7 outside price - $4 variable cost) = 50,000 × $3 savings = $150,000 - $80,000
opportunity cost = $70,000 increase

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Medium
Lanen - Chapter 15 #89
Learning Objective: 2
Topic Area: Applying the General Principle
90. Bayfield Division of Ashland Inc. has a capacity of 200,000 units and expects the following results.

Washburn Division of Ashland Inc. currently purchases 50,000 units of a part for one of its products
from an outside supplier for $4 per unit. Washburn's manager believes he could use a minor variation
of Bayfield's product instead, and offers to buy the units from Bayfield at $3.50. Making the variation
desired by Washburn would cost Bayfield an additional $0.50 per unit and would increase Bayfield's
annual cash fixed costs by $20,000. Bayfield's manager agrees to the deal offered by Washburn's
manager.
a. What is the effect of the deal on Washburn's income?
b. What is the effect of the deal on Bayfield's income?
c. What is the effect of the deal on the income of Ashland Inc. as a whole?

a. $25,000 increase
b. $10,000 increase
c. $35,000 increase

Feedback: a. 50,000 units × ($4 current price - $3.50 new price) = 50,000 × $0.50 = $25,000 increase in
profit
b. lost sales [160,000 - (200,000 - 150,000)] × ($4 - $2) = $20,000 opportunity cost; 50,000 units ×
[$3.50 - ($2.00 + $0.50)] - $20,000 increase in fixed - $20,000 opportunity cost= $10,000 increase in
profit
c. $25,000 + $10,000 = $35,000 increase

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Medium
Lanen - Chapter 15 #90
Learning Objective: 2
Topic Area: Applying the General Principle
91. Division A of Stills Company expects the following results

Division B has the opportunity to buy its needs of 5,000 units from an outside supplier at $45 each.
Required: Answer 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 Stills.
b. Division A cannot increase its sales to outsiders, does meet the $45 price, and Division B continues to
buy from A. Compute the effect on the income of Stills.

a. $45,000 decrease
b. no change

Feedback: a. 5,000 units × ($45 outside price - $36 variable cost) = $45,000 decrease
b. no change. Division A will show less profit but B will show an equal amount of increased profit.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Medium
Lanen - Chapter 15 #91
Learning Objective: 2
Topic Area: Applying the General Principle
92. Rosy Division of Acme Inc. has a capacity of 100,000 units and expects the following results for the
year.

Amy Division of Acme Inc. currently purchases 20,000 units of a part for one of its products from an
outside supplier at $32 per unit. Amy's manager believes she could use a minor variation of Rosy's
product instead, and offers to buy the units from Rosy at $26. Making the variation desired by Amy
would cost Rosy an additional $5 per unit and would increase Rosy's annual cash fixed costs by
$80,000. Rosy's manager agrees to the deal offered by Amy's manager.
Required:
a. Find the effect of the deal on Amy's income
b. Find the effect of the deal on Rosy's income.
c. Find the effect of the deal on the income of Acme Inc. as a whole.

a. $120,000 increase
b. $160,000 decrease
c. $40,000 decrease

Feedback: a. 20,000 units × (old price $32 - new price $26) = $120,000 increase
b. lost sales by Rosy: 10,000 units × ($30 - $20) = $100,000 opportunity cost; 20,000 units × [$26 - ($20
+ $5)] - added fixed of $80,000 - opportunity cost $100,000 = $160,000 decrease.
c. Acme = Amy + Rosy = $120,000 - $160,000 = $40,000 decrease

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Medium
Lanen - Chapter 15 #92
Learning Objective: 2
Topic Area: Applying the General Principle
93. Division A of Stills Company expects the following results:

Division B has the opportunity to buy its needs of 5,000 units 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 Stills allows the divisional managers to negotiate transfer prices. What would the
maximum transfer price be?
c. Assume that Stills allows the divisional managers to negotiate transfer prices. What would the
minimum transfer price be?

a. $36
b. $45
c. $36

Feedback: a. Division A operating at less than capacity, optimal transfer price = variable cost $36
b. Maximum price is the outside vendor price of $45.
c. The minimum price would be the outlay cost to Division A: variable costs = $36

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Medium
Lanen - Chapter 15 #93
Learning Objective: 2
Topic Area: Applying the General Principle
94. Woodville Industries evaluates its divisions based on residual income. The Hilton Division has the
capacity to produce 20,000 units of a component. The Hilton Division's variable costs are $150 per unit;
fixed costs are $110 per unit.
The Sutton Division can use the product as a component in one of its products. The Sutton Division
would incur $75 of variable costs to convert the component into its own product which sells for $300.
Required (consider each question independent of each other):
a. Assume the Hilton Division can sell all that it produces for $285 each. The Sutton Division needs
1,000 units. What is the appropriate transfer price?
b. Assume the Hilton Division can sell 18,000 units at $285. Any excess capacity will be unused unless
the units are purchased by the Sutton Division (which can use up to 1,000 units). What are the minimum
and maximum transfer prices?

a. $285
b. $150 minimum; $225 maximum

Feedback: a. Hilton is at full capacity: market price = $285

b. Hilton is at less than full capacity. Minimum price = variable cost of Hilton = $150; Maximum price
= incoming market price to Sutton, but this is unknown. The most Sutton will pay is the selling price of
the final product $300 less incremental variable costs of $75 = $225.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Medium
Lanen - Chapter 15 #94
Learning Objective: 2
Topic Area: Applying the General Principle
95. Toledo Shipping, Inc., operates two divisions: (1) a shipping division that owns and manages bulk
carriers on the Great Lakes and (2) a repair division that operates a dry dock in Port Huron, Michigan.
The repair division works on company ships, as well as other large-hull ships.
The repair division has an estimated variable cost of $45 per labor-hour. The repair division has a
backlog of work for outside ships. They charge $125 per hour for labor & overhead, which is standard
for this type of work. The management 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 shipping division should pay?
c. If the repair division had idle capacity, what is the minimum transfer price that the repair division
should obtain?

a. $125/hr
b. $85/hr
c. $45/hr

Feedback: a. Repair is operating at capacity, transfer price = market price = $125/hr

b. The maximum that shipping will pay is the "incoming" price of $85/hr. It is in the best interest of the
company profits for shipping to buy outside and repair continue with it's high rates selling to outsiders.
c. If repair has excess capacity, the minimum transfer price is the variable cost of $45.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Medium
Lanen - Chapter 15 #95
Learning Objective: 2
Topic Area: Applying the General Principle

96. Stearns 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?

a. $60
b. $35

Feedback: a. Operating at capacity: transfer price = market price = $60

b. Below capacity: optimal price = outlay cost = $35. Fixed costs are not outlay costs.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Medium
Lanen - Chapter 15 #96
Learning Objective: 2
Topic Area: Applying the General Principle
97. Stills Company expects the following results:

Included in Division A's costs are 10,000 units of a subcomponent purchased from an outside supplier
for $45. The managers have recently initiated negotiations for Division B to supply the components to
Division A. Division B has a total capacity of 40,000 units.
Required:
a. Would Stills Company prefer the subcomponent used by A to be purchased internally from B or from
the outside vendor?
b. What would be the maximum and minimum transfer prices?

a. internal transfer
b. minimum $36, maximum $45

Feedback: a. Division B variable cost = $900,000/25,000 = $36. Internal purchase: inside cost 10,000
units × variable cost $36 = $360,000; outside: 10,000 × $45 = $450,000
b. minimum = variable cost $36; maximum incoming market $45

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Medium
Lanen - Chapter 15 #97
Learning Objective: 2
Topic Area: Applying the General Principle
98. Stills Company expects the following results:

Included in Division A's costs are 10,000 units of a subcomponent purchased from an outside supplier
for $45. The managers have recently initiated negotiations for Division B to supply the components to
Division A. Division B has a total capacity of 40,000 units.
Required:
a. Prepare a new segment reporting statement for Stills, assuming an internal transfer at the maximum
transfer price.
a. Prepare a new segment reporting statement for Stills, assuming an internal transfer at the minimum
transfer price.

Feedback: a. maximum price = $45; new variable costs for B: ($900,000/25,000) × 35,000 = $1,260,000;
no change in variable cost to A
b. minimum price = variable cost = $36; new variable costs for A: $1,360,000 - old cost (10,000 × $45) +
new cost (10,000 × $36) = $1,360,000 - $90,000 = $1,270,000

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Medium
Lanen - Chapter 15 #98
Learning Objective: 5
Topic Area: Segment Reporting
99. Ryman Company has two divisions organized as profit centers: Redmon and Tomlin. Ryman expects
the following results:

Included in Redmon's costs are 100,000 units of a subcomponent purchased from an outside supplier
for $4.50. The managers have recently initiated negotiations for Tomlin to supply the components to
Redmon. Tomlin has a total capacity of 400,000 units.
Required:
a. Would Ryman Company prefer the subcomponent used by Redmon to be purchased internally from
Tomlin or from the outside vendor? What would be the profit impact?
b. What would be the maximum and minimum transfer prices?

a. Yes. $50,000 increase in profit

b. maximum: $4.50; minimum: $4

Feedback: a. internal cost = variable cost = $1,000,000/250,000 units = $4; external price = $4.50;
prefer internal: 100,000 units × ($4.50 - $4) = $50,000 more profit
b. maximum = outside price $4.50; minimum = variable cost = $4

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Medium
Lanen - Chapter 15 #99
Learning Objective: 2
Topic Area: Applying the General Principle
100. Ryman Company has two divisions organized as profit centers: Redmon and Tomlin. Ryman expects
the following results:

Included in Redmon's costs are 100,000 units of a subcomponent purchased from an outside supplier
for $4.50. The managers have recently initiated negotiations for Tomlin to supply the components to
Redmon. Tomlin has a total capacity of 400,000 units.
Required:
a. Prepare a new segment reporting statement for Ryman, assuming an internal transfer at the maximum
transfer price.
a. Prepare a new segment reporting statement for Ryman, assuming an internal transfer at the minimum
transfer price.

Feedback: a. maximum price = $4.50; new variable costs for B: ($1,000,000/250,000) × 350,000 =
$1,400,000; no change in variable cost to A
b. minimum price = variable cost = $4.00; new variable costs for A: $1,360,000 - old cost (100,000 ×
$4.50) + new cost (100,000 × $4) = $1,360,000 - $50,000 = $1,310,000

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Medium
Lanen - Chapter 15 #100
Learning Objective: 5
Topic Area: Segment Reporting
101. Meredith Motor Works has just acquired a new Battery Division. The Battery Division produces a
standard 12volt battery that it sells to retail outlets at a competitive price of $20. The retail outlets
purchase about 800,000 batteries a year. Since the Battery Division has a capacity of 1,000,000 batteries
a year, top management is thinking that it might be wise for the company's Automotive Division to start
purchasing batteries from the newly acquired Battery Division.
The Automotive Division now purchases 300,000 batteries a year from an outside supplier, at a price of
$18 per battery. The discount from the competitive $20 price is a result of the large quantity purchased.
The Battery Division's cost per battery is shown below:

Fixed costs are based on 1,000,000 batteries.

Both divisions are to be treated as investment centers, and their performance is to be evaluated by the
ROI formula.
Required:
a. What transfer price would you recommend and why?
b. What transfer price would you recommend if the Battery Division is now selling 1,000,000 batteries a
year to retail outlets?
c. Suppose the manager of the Battery Division can increase its capacity to 1,500,000 units for
$1,200,000. She then has the option of (a) cutting the retail price to $17.50 with the certainty that sales
will increase to 1,500,000 batteries, or (b) maintaining the outside price of $20.00 for the 800,000
batteries and transferring the 300,000 batteries to the Automotive Division at some price that would
produce the same income for the Battery Division as option (a). What is the minimum transfer price you
would recommend in this situation?

a. Any price between the selling division's variable cost ($14 per unit) and the buying division's external
market price ($18).
b. There is no price that's acceptable in this case since the selling division's external market price ($20) is
greater than the buying division's external market price ($18).
c. $15.50

Feedback: c. [($17.50 - $14) × 1,500,000] = [($20 - $14) × 800,000] + [($X - $14) × 300,000];
X = $15.50 (Note: The increased fixed costs of $1,200,000 are irrelevant to this decision.)

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Hard
Lanen - Chapter 15 #101
Learning Objective: 2
Topic Area: Determining the Optimal Transfer Price
102. Metalbinders, Inc., has two divisions for its metal fabrication business. Division A stamps the objects
and then transfers them to Division B, which finishes and sells them. Last year, Division A had
administrative expenses of $40,000. Division B incurred additional production costs of $120,000
(exclusive of amounts paid to Division A for the stamped steel) to process 120,000 units. Division
B sold the finished goods for $500,000 and incurred $80,000 in variable selling and administrative
expenses.
Required:
a. Prepare income statements for each division. Use a transfer price of Division A's total cost plus 5%.
Assume Cost of Goods Sold for Division B is $351,000.
b. Repeat (a), using a transfer price of $2.00 per unit; this is also the market price.
c. Repeat (a), using a negotiated transfer price of $1.90 per unit.
d. Which transfer price results in higher income to Metalbinders, Inc.?

d. In terms of total company income, transfer prices have no impact; i.e., the total profit is $80,000
regardless of how it is allocated between the two divisions. However, different pricing systems can
provide managers with different incentives, which may have an impact on profits.

Feedback: a. Sales Division A = Division B COGS $351,000 - $120,000 added costs = $231,000;
$231,000 = 105% of Division A costs; Division A cost = $231,000/105% = $220,000; $220,000 -
$40,000 other costs = $180,000 Div A COGS

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Hard
Lanen - Chapter 15 #102
Learning Objective: 2
Topic Area: Determining the Optimal Transfer Price
103. Division S sells its product to unrelated parties at a price of $20 per unit. It incurs variable costs of $7
per unit and has fixed costs of $50,000 per month. Monthly production is generally 10,000 units.
Division B uses Division S's product in its operations. It can purchase the units from Division S at
$20 per unit, but must pay a $1.50 per unit in shipping costs. Alternatively, Division B can buy from
Division S's competition at a delivered price of $21 per unit.
Required:
a. From the company's perspective, should Division B purchase the units internally or externally?
Assume Division S has ample capacity to handle all of Division B's needs.
b. Would your answer change if Division S can sell everything it produces to outside customers?

a. internal transfer since Division A has ample capacity

b. better to have external supply

Feedback: a. External $21, internal $7 variable cost + $1.50 shipping = $8.50; savings = $21 - $8.50 =
$12.50 × 10,000 units = $125,000
b. Purchase internal: $20 + $1.50 = $21,50 vs $21 external

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Hard
Lanen - Chapter 15 #103
Learning Objective: 2
Topic Area: Determining the Optimal Transfer Price
104. Roberts Machinery Company manufactures heavy-duty equipment used in foundries, mining operations,
and similar operations. The company is very decentralized, with various division managers having
control over capital investments and most production decisions. The Cylinder Division fabricates
a component which is used by the Press Division in its production of metal presses. The Cylinder
Division has been selling to the Press Division at a price of $3,000 per unit. Because of a cost increase,
the Cylinder Division wants to increase its price to $3,200, even though the Press Division can still
purchase an equivalent component externally for $3,000. The following information has been gathered
regarding this issue:

Required:
a. If the Press Division buys its units externally, the Cylinder Division will have idle capacity for which
there are no alternative uses. Will the company as whole benefit if the Press Division purchases its units
externally for $3,000 per unit?
b. If the Press Division buys its units externally, the Cylinder Division will have idle capacity which
can be used to generate a positive cash flow of $40,000. Will the company as whole benefit if the Press
Division purchases its units externally for $3,000 per unit?
c. Refer to (b). Will your answer change if the price at which the Press Division can buy externally
decreases to $2,700 per unit? Support your answer.

a. No, the company as a whole will have $60,000 in less profit if there is an external transfer.
b. No, the company will still have $20,000 less profit with an external transfer.
c. The company would prefer an external purchase as profits will increase by $10,000

Feedback: a. External purchase: 100 × $3,000 = $300,000; internal purchase: 100 × $2,400 variable cost
= $240,000; differential in profit = $60,000 decrease
b. External purchases $300,000 - $40,000 usage of capacity = $260,000; internal = $240,000;
differential = $20,000 decrease
c. External purchase: 100 × $2,700 = $270,000 - $40,000 = $230,000 vs $240,000 internal; differential
$10,000 increase in profit.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Hard
Lanen - Chapter 15 #104
Learning Objective: 2
Topic Area: Determining the Optimal Transfer Price
105. The ABC Manufacturing Company has a division (P Division) that produces an essential ingredient
used by the Lawn Division in making lawn fertilizer. Historically, 75% of Division P's output has been
purchased by Division L and 25% has been sold to other fertilizer companies. The transfer price
between Division P and Division L has been based on the outside sales price less selling and
administrative expenses directly applicable to the outside sales. Last year, the transfer price was $35
per ton; Division P would like the same transfer price this year. However, the general manager of
Division L has found an outside supplier who will sell the ingredient for $30 per ton. She would like to
continue buying from Division P, but Division P's manager does not want to match the $30 price
because he thinks that the margin is too small. Top management does not get involved in transfer
pricing disputes, but rather, allows division managers to make their own decisions concerning internal
or external purchases and sales.
The following information has been gathered regarding Division P's operations last year:

The information presented above is based on selling 120,000 tons internally and 40,000 tons externally.
Required:
a. If Division L buys externally, Division P can increase its current external sales by only 20,000 tons.
What arguments can the general manager of Division L make to help Division P to match the $30 price?
b. Division L wants to use only one supplier so Division P will either sell 120,000 tons to Division L
or nothing. If Division L's capacity is 160,000 tons, how many units does Division P need to sell to
outsiders at $50 per ton before it is better off selling to outsiders? Ignore any additional marketing costs
which would be incurred to increase sales.

a. drop price internally, overall profit = $1,120,000; lose inside sales, increase outside, overall profit =
$1,020,000
b. 64,000 tons

Feedback:

No internal sales, external increases by 20,000

b. There needs to be $1,600,000 in contribution margin. The contribution margin per ton is $50 - $25 =
$25. Volume needed is $1,600,000/$25 = 64,000 tons

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Hard
Lanen - Chapter 15 #105
Learning Objective: 2
Topic Area: Determining the Optimal Transfer Price
106. Why is transfer pricing only a concern for profit or investment centers and not for cost or revenue
centers?

A cost center is not concerned with making a profit, only with controlling costs. Similarly, a revenue
center is also not concerned with profits, only with revenues. Transfer prices consider the profit impact
of making a decision as to the source of a product.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Medium
Lanen - Chapter 15 #106
Learning Objective: 1
Topic Area: What Is Transfer Pricing and Why Is It Important?

107. Explain the general principle for determining the optimal transfer price.

The general principle for an optimal transfer price is to set the price equal to the outlay cost for the
supplier up to the point of transfer and opportunity cost of the resources of the supplier. This principle
should result in a transfer price that leads managers to make decisions in the firm's best interests.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Medium
Lanen - Chapter 15 #107
Learning Objective: 2
Topic Area: Optimal Transfer Price: A General Principle

108. What is meant by a dual transfer pricing system? What are some advantages and disadvantages of it?

A dual transfer pricing system is one where the selling division is awarded a price that includes profits
while the buying division is charged only for costs. The advantage is this type of system encourages
transfers. Disadvantages include the transfer price will not serve as a signal as to the value of the good
to the firm. Performance evaluation is also more difficult under this system.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Medium
Lanen - Chapter 15 #108
Learning Objective: 3
Topic Area: Remedying Motivational Problems of Transfer Pricing Policies

109. What are the limitations of market-based transfer prices?

A perfect intermediate market may not exist, there may be differences between the internal products and
those available on the market with respect to distribution costs, quality, or product characteristics.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Medium
Lanen - Chapter 15 #109
Learning Objective: 3
Topic Area: Establishing a Market Price Policy
110. What are the advantages and disadvantages of using a negotiated transfer price?

The major advantage of a negotiated transfer price is that it preserves the autonomy of the divisional
managers. The disadvantages include 1) a great deal of management time may be consumed by the
negotiating process and 2) the final price and its implications for performance measurement could
depend more on the manager's ability to negotiate than on what is best for the company.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Medium
Lanen - Chapter 15 #110
Learning Objective: 3
Topic Area: Negotiating the Transfer Price
 ch15 Summary
Category # of Questions
AACSB: Analytic 110
AICPA: FN-Decision Making 108
AICPA: FN-Measurement 2
Blooms: Analysis 62
Blooms: Application 3
Blooms: Comprehension 44
Blooms: Knowledge 1
Difficulty: Easy 56
Difficulty: Hard 11
Difficulty: Medium 43
Lanen - Chapter 15 116
Learning Objective: 1 8
Learning Objective: 2 67
Learning Objective: 3 26
Learning Objective: 4 4
Learning Objective: 5 5
Topic Area: Applying the General Principle 42
Topic Area: Centrally Established Transfer Price Policies 4
Topic Area: Determining the Optimal Transfer Price 20
Topic Area: Establishing a Cost-Basis Policy 6
Topic Area: Establishing a Market Price Policy 3
Topic Area: Global Practices 1
Topic Area: How to Help Managers Achieve Their Goals While Achieving the Organizations Goals 3
Topic Area: Multinational Transfer Pricing 3
Topic Area: Negotiating the Transfer Price 7
Topic Area: Optimal Transfer Price: A General Principle 5
Topic Area: Remedying Motivational Problems of Transfer Pricing Policies 1
Topic Area: Segment Reporting 5
Topic Area: Top-Management Intervention in Transfer Pricing 2
Topic Area: What Is Transfer Pricing and Why Is It Important? 8