come i0 Tale Phig . ite “False” if the 1. TRUE OR FALSE STATEMENTS Write “Tru” ifthe statement is true nd wr 5 statements false other divisi $1. Divisions within vertically integrated companies normally sell goods only 10 ae within the same company. S steutttlitael 2. Using the negotiated transfer pricing approach, a minimum transfer Price iS by the selling division. stesed. 3, There ae two approaches for determining a transfer price: cost-based arcane 4. Ifa cost-based transfer price is used, the transfer price must be based ee ces 5. A problem with a cost-based transfer price is that it does not provide wren the selling division to control costs. _ " a in of 6. Inthe formula for a minimum transfer price, opportunity cost is the contribution margin o goods sold externally. a ‘ 7, Themarket based proach produces a higher total contribution margin to the company than the/cost- proach. v8 cay nce gus ef eg os mt exist. £9. The number of transfers between divisions that are located in different countries has decreased as companies rely more on outsourcing. a T 10. Differences in tax rates between countries can complicate the determination of the appropriate transfer price. T 11. Decentralization provides a more effective basis for measuring a manager's performance. ~ ¥ 12.A transfer price is the price charged for the goods and services purchased from outside suppliers. i ¥ 13. A transfer price is the price charged for the gooks and services sold to the outside customers. + 14. A transfer price should be set equal to the difference between variable cost and sales price per unit. 15. A transfer price of a division operating at less than full capacity should be equal to the outside market. “716. If the transfer price is high, it would result in a high profit of the selling division and low profit for the buying division. 17. Inall respect, the objective of transfer price is goal congruence. rj 18. The general rule formula for transfer price must be equal to the additional outlay cost ~ incurred because goods are transferred, plus any opportuni it to the organization __ because ofthe transfer. con tal ei 19, Dysfunctional behavior is normally observed among the divisions particularly ifthe basis of performance measure is profit 20. Dysfunctional behavior is any action taken in conflict with organizational goals. 21. The general rule formula for transfer pricing is applicable only to an assumption of no idle capacity, > 22. Inmaking a decision related to transfer pricing, trade-offs must not be considered 23. Transfer prices could bé any amount as agreed. by the parties involved in the transfer of goods and services between responsibility center. 4 oe ertag i When eon eee at capacity, the transfer price to other divisions includes an 25, Transfer prices based on cost ior, i incenti Teaser pices pcos are superior, in that, they provide incentive forthe control of Va wa 4pub CHOICE QUESTIo oT eter that coresponds ong d. opportunity cost eed 0 different pricin, Tot deternenig 2 72m division to division 4) time and material ap a cost-based transfer price j when Price is.used, the transfer price may be based on any of the (a.) fixed cost. 'p. full cost. c. variable cost. 4. allof these may be used. |, Al of the following are correct statements about the cost-based transfer price approsch ‘ecept that it ‘a. can understate the actual contribution to profit by the selling division. can reduce a division manager's control over the division's performance. bases the transfer price on standard cost instead of actual cost. provides incentive forthe selling division to control costs. i The general formula for the minimum transfer price: minimum transfer price equals t a. fixed cost + opportunity cost. , b. external purchase price. c., total cost + opportunity cost. ‘ 4.) variable cost + opportunity cost. NK Varabe costs of units sold internally will always ' a. lower than the variable costs 1 ee uni ternally. higher than the variable costs hi cimra b units sol . the same asthe variable cost of "be either higher oc lower than for writs variable costs of units sold internally ma sold externally r y of the 1 the formula for the sninimum wranser PHC opportunity cost is the —__— Pods sold externally & variable cost b total costGhaoter 0 Tmnate Propo ln selling price contribution margin 8 ‘The transfer price approach that conceptuall should work the best is the & cost-based approach, 7 market-based (G) negotiated price a | time and material pricing approach. 9. The transfer price approach that is often considered the best approach because it generally ides the Provides, cost-based approach, 10. All ofthe following are correct statements about the market-based approach except that it . assumes that the transfer price should be based on the most objective inputs Possible. b. provides a fairer allocation of the company's contribution margin to each ©) Produces a higher company contribution margin than the cost-based approach. |. ensures that each division manager is properly motivated and rewarded, 11. The negotiated transfer price approach should be used when a. the selling division has available capacity and is willing to accept less than the _s, market price. \b! an outside market for the goods does not exist. no market price is available. d. any of these situations exist. 12. Assuming the selling division has available capacity, a negotiated transfer price should be within the range of a. fixed cost per unit and the external purchase price. 22, total cost per unit and the external purchase price. |4s, variable cost per unit and the external purchase price. \d) variable cost per unit and the opportunity cost. 13. The transfer price approach that wil result in the largest contribution margin to the buying nee ee (a) cost-based approach. 'b. market-based approach. negotiated price approach. d._ time and material pricing approach. 14. The maximum transfer price from the buying division's standpoint is the a. total cost + opportunity cost. b. variable cost + opportunity cost.) external purchase price a Price + op a + sig cn following are correct . i on different tax rates statements about a ent gitferenc in tax rates on tat between divisions located in Price. 088 coun tries many companies prefer to complicate the determination of the CHOICE PROBLEMS Encircie + Mgacing robles circle the letter that corresponds to the best answer of the it of the Catering Com, anagemen pany would like the Food Divisi awe he Rett San Thon Pe Food Division's variable cost per unit is P60 and its . ne cost per unit is P20. The Food Division is current i ss i we unimum transfer Price the Food Divs ion sho y cperating st bs eae: What is : of the Catering Company would like the Food Division to transfer 10,000 cans ~ gis final product to the Restaurant Division for P80. ‘The Food Division sells the product * Saustomers for P140 per unit. ‘The Food Division's variable cost per unit is P60 and its jyed cost per unit is P20. The Food Division has 10,000 units available capacity. What is the menimum transfer price the Food Division should accept? a/P20 b. P60 4, P80 4.) PI40 Use the following information for the next two questions: The Woorl Division of Furniture Products, fn manufactures wood moldings and ‘ls them externally for P100. Forrible cost is PAO per unt and its fixed cost per uni is PA The company’s president wants the Wood Division 19 transfer 5,000 units to another | npany division at a price of P54. fang the Wood Division has available capacity of 5,000 units, the minimum transfer itshould accept is PL no , ts Lar eemer ieTanseerng 4 Assuming the Wood Division does not have any available capacity, the minimam tanse price it should accept is a Pi. b. Péo. P54, @ pm. 5. The Berg Company has two decentralized divisions, Alpha and Lao amare bought circuits from Alpha at P50 per unit. Because Alpha can OFT YA by por unit Company for PB0 per unit, Alpha wants to charge Beta the same. It costs AVP ; snnum of 1,500 circuits per variable costs, P10,000 fixed costs, and it can produce a maximum - month. If Berg allows Beta to buy from an outside marke, Alpha has excess capacity. What : and Beta? would be the result if Berg instigated a tr P80 between Alpha : ‘a. The company ae tn a could be bought cheaper outside the firm, : ® ‘The company would be better off to buy inside, regardless ofthe transfer Price. % The company would be better off with a transfer price of P40. 4. The company would be better off allowing Beta to buy the circuit outside. 6. The Mars Company has two divisions, A and B. Division A produces and sells a product and can sell its entire output to outside customers. The following data for Division A’s | | | producti available: Selling price unit + Variable cost unit Fixed cost per unit | Division B can use Division A’s product in its Production process and would like to buy this product vision A. Division Bis presently purchasing the product from an outside supplier at unit. Assuming that Division A is operating at full capacity, what is the minintunf price that Division A should charge for the units sold to Division B? . PS Mra A P20 {q) Some price between P12 and P23. Use the following information for the next three questions: Hubcap Division of Motorcar, Inc. sells some of its output to outside firms and some to the Assembly Division of Motorcar, Inc. Assume the following information: Variable cost (per unit) PS Fixed Cost (per unit) P2 Capacity (in units) 300,000 Selling price to outsiders PIO 7. Assume Hubcap Division could sell its entire output to outsiders at the current price but that Assembly Division offers to buy half the output at a price of P9 each. Under what circumstances might such a transaction benefit Hubcap Division? a. Only if the increase in variable cost per unit is kept to less than PIL b. Only if total fixed costs per unit remains constant.jg the Assembly Divi only if ‘ ivision can buy if variable costs of ty hubcaps. at ear PSD aes eer fore tan F2 no" L pap Divisiogy eseame that onk i gain ta en ee cee : anc charg on is le without ng mo eine lowest price nat P cap 300K {reducing its own segment marBiN? op 150K “3 rial He ants eine: selling its entire output externally at P10 charge the Assembl: some of Hubcap's output, what is the minimum PHICE ly Division without reducing its own segment margin’? yt Division and West Division are operated as orld, Ene- East Division manufactures a single capac Budgeted amounts for the current Sales (10,000 units) Direct labor "250,000 Direct materials 200,000 Overhead (1/3 fixed) 300,000 eo sn en pt What is the minimum price that East cancer without reducing its current profitability? Capacity) IK — need 3k OK two divisions of the Cook Company can be “in appropriate transfer price between iéermined from the following data: a ‘abricating Division iv Market price of subassembly p50 Number of units Variable cost of assembly Excess capacity (in units) 1,000 needed 900 Matis the natural bargaining "@7B° for the two divisions? «) between P20 and / ®. between P50 and P70 - 4 P50 is the only acceptable price ¥ P20is the only acceptable Pricea its and fixed manufacturing Division A has an expected annual production of 50,000 units ual production ig costs of P300,000. The full absorption cost per unit is computed based follows: Variable costs P6oo Fixed costs (P300,000 / 50,000) 00 Total full absorption cost per unit p20 ‘jeri units Division A has ile capacity and Division B is considering t0 by 10000 Shs rom Division A to be processed further and to sell at P21.00 per unit. it respectively. additional processing costs and selling costs of P6.00 and P5.00 per unit an 12. The total cost per unit to Division B assuming transfer price is based on full absorption a. P17.00 f b. Piso 2“ s P13.00 4.)P23.00 13. The contribution margin absorption cost would be a PAO b) P00) “é P200 d. P8.00 to profit per unit to Division B if the transfer price is based on full 14. What would be the total contribution margin to profit the company as awhole for 10,000 ‘units transferred to Division B and later sold to outside customers at PZ1.00 per unit? a. P20,000 .)P40,000 © (P20,000) 4. P80,000 Use the following data for the next five questions: Chip Division and the Computer Division. The Computer Chip Division manufactures one Product, a "super chip," following edn, tO fhe Computer Divison and ther exert eager information is available on this month's Operations in the Computer Chip Selling price per chip P50 Variable costs per chip P20 Fixed production costs 60,000 nee SG&A costs 90,000 lonthly capacity 10000. chiy External sales 6,000 chips Internal salesry presently, the Computer ee on, but instead pay vision so PPI 19 an eS 20 eins ro SUPPliex for the the Computer Chips 4,000 chips it needs each 5 oup OE Hig ossible transfer Of the supe nth. What eee oT i the Computer and Computer wey Pod Chip from i ane minimum of : 5 PB Oe division tothe a ee Price Fane ) p20 c sg. PBS came that next month's » ‘Divisions are similar to tt Vo opera ° ible transfer SUS month, operations in the Computer and C = i Of the chip from one dng at 1um of the transfer price range D os Alivision tothe other? b) PBS d. P30 «Wo possible transfer prices (for , at Cato ec tee than PAO. ___ MPSS in selected an the sie a. P20,000 larger . P40,000 larger c. P20,000 smaller d., the same fa transfer between the two divisions is arranged next peri i it super chips) of P40, total profits in the Compute Chap hon “il ogee a. rise by P20,000 compared to the prior period. b. drop by P40,000 compared to the prior period. drop by P20,000 compared to the prior period. 4) 20» +000 4. rise by P80,000 compared to the prior period. that Computer Chip Division is selling all that it can per unit. How would overall corporate profits be affected Division at P45? (Assume that Computer Division can Asume, for this question only, Poduce to external buyers for P50 £1 sells 4,000 units to Computer chase the super chip from an outside supplier for P45) 2 no effect 20,000 increase ©, P20,000 decrease © 90,000 increaseSactec10 natcPhg charges B P35 20, A company has two divisions, A and B, each operated as a profit center. A per unit for each unit transferred to B, Other data follow: A's variable cost per unit P30 A's fixed costs 10,000 A's annual sales to B 5,000 units A's annual sales to outsiders 50,000 units - . it. Division B Division A is planning to raise its transfer price to P50 per unit. Divison, B can Purchase units at P40 each from outsiders, but doing so would idle A's faciiltes now committed to producing units for B. Division A cannot increase its sales to outsiders. From the perspective of the company as a whole, from whom should Division B acquire the units, assuming B's market is unaffected? a. outside vendors b. Division A, but only at the variable cost per unit ©. Division A, but only until fixed costs are covered, then should purchase from outside vendors (® Division A, in spite of the increased transfer price