N12401 MAD II

Self Assessment
Transfer Pricing

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These exercises are meant to confirm your understanding of the topic concerned. You are expected to
have gone through the class materials and directed readings thoroughly before attempting these
exercises. As you work through these questions, you may find new terminologies/ideas popping out
occasionally, dont get worried at all, as these are deliberate to trigger further exploration of the issues
concerned. So be adventurous and have fun!
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1.

In a decentralized organization:
a.
local-division managers must receive higher approval for most business decisions
b.
company-wide standard operating procedures are common
c.
local-division managers have an opportunity to gain decision-making experience
d.
decisions are made by senior executives

2.

All of the following would likely be classified as cost centers except:

a.
Maintenance department at local grocery store.
b.
your universitys computer center
c.
X-ray department of hospital
d.
All of the above are cost centers.

3. A local unit is evaluated as a profit center but the corporate office controls many facets of the
operation. If local-unit performance is poor, it may reflect:
a.
poor corporate decisions
b.
poor local decisions
c.
conditions that no one can control
d.
All of the above are correct.
4. All of the following are true of a revenue center EXCEPT that it:
a.
controls service quality and units sold
b.
controls the acquisition cost of the product or service sold
c.
may control price, product mix, and promotional activities
d.
may incur sales and marketing costs
5. Caution should be taken when interpreting a segment margin income statement because:
a.
revenues may be based on transfer prices
b.
the interactive effects among responsibility centers are generally not clearly captured
c.
expenses may be a result of subjective allocation of jointly incurred costs
d.
All of the above are correct.
6. The primary goal of transfer pricing is to:
a.
motivate the decision maker to act in the organizations best interests
b.
obtain a high transfer price for the supplying unit
c.
obtain a high transfer price for the receiving unit
d.
agree on a price for external sales
7. All of the following are true of market-based transfer prices EXCEPT that they:
a.
may lead to goods/services being purchased externally
b.
provide an independent valuation
c.
exist for all transferred products and services
d.
provide the proper economic incentives
8. All of the following are true of cost-based transfer prices EXCEPT that they:
a.
provide no incentive to the supplying division to control costs when actual costs are used
b.
may use standard costs to help maintain operating efficiency
c.
promote the optimal level of transactions for the overall organization
d.
dont give proper guidance when operating capacity is constrained

N12401 MAD II

Self Assessment
Transfer Pricing

9. The MOST likely result of a negotiated transfer price is that it:

a.
takes away the ultimate responsibility of the resulting transfer price from the two parties
b.
may reflect the relative negotiating skills of the two parties
c.
generally results in transferring more than the optimum number of units
d.
reflects purely economic considerations
10. The general formula for the minimum transfer price is: minimum transfer price equals
a.
fixed cost + opportunity cost.
b.
external purchase price.
c.
total cost + opportunity cost.
d.
variable cost + opportunity cost.
11.

The
a.
b.
c.
d.

negotiated transfer price approach should be used when

the selling division has available capacity and is willing to accept less than the market price.
an outside market for the goods does not exist.
no market price is available.
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.
b.
total cost per unit and the external purchase price.
c.
variable cost per unit and the external purchase price.
d.
none of these is correct.
13. The transfer price approach that will result in the largest contribution margin to the buying division
is the
a.
cost-based approach.
b.
market-based approach.
c.
negotiated price approach.
d.
time and material pricing approach.
14.

The
a.
b.
c.
d.

maximum transfer price from the buying division's standpoint is the

total cost + opportunity cost.
variable cost + opportunity cost.
external purchase price.
external purchase price + opportunity cost.

15. Mathis Corporation.

(a) The minimum transfer price is $260 [$105 + ($260 $105)], the outside market
price, since Mathis is operating at full capacity.
(b)The minimum transfer price is $105, the variable cost of the changers, since Mathis
has excess capacity. However, since the market price is $240 (American's current
cost), Mathis should be able to negotiate a price much higher than $105.
16. Modine Manufacturing.
(a) The minimum transfer price that Modine should accept is:($60 $4 + ($215 $60)
= $211
(b) The decrease in contribution margin per unit to Datson is:
Contribution margin lost by Modine ($215 $60)
$155
Increased contribution margin to vehicle division ($200 $56) 144
Net decrease in contribution margin
$ 11
Total contribution margin decrease is: $11 100,000 units = $1,100,000

N12401 MAD II

Self Assessment
Transfer Pricing

17. Pubworld.
(a)
i. Assuming that the printing operation has available capacity, the printing
operation's variable cost is $0.01 and its opportunity cost is $0. The minimum
transfer price would be $0.01 = $0.01 + $0. Therefore, in this case, the printing
operation should accept the offer to print internally. The $0.012 transfer price
would provide a contribution margin of ($0.012 - $0.01) or $0.002 per page.
Depending on its bargaining strength, the printing operation might want to ask for
a transfer price higher than $0.012, since the company is saving money at any
price below the $0.015 price charged by outside printers.
ii. Assuming no available capacity, the printing operation's variable cost is $0.01 per
page and its opportunity cost is ($0.02 $0.01) or $0.01 per page. The minimum
transfer price would be $0.02 = $0.01 + $0.01. Therefore, the printing would not
accept the internal transfer price of $0.012.
(b) Change in contribution margin for each company:
Printpro would lose: ($0.02 - $0.01) 600 pages 5,000 copies = $30,000
Pubworld would save: ($0.015 $0.012) 600 pages 5,000 copies = $9,000
18. CoolFan Plc.
Division C: Decrease by $45,000
CoolFan Plc: Decrease by $32,500
19. CareFree Plc.
Transfer price at $12.90.