TRANSFER PRICING

Transfer Pricing Formula

76. The management of James Corporation has decided to implement a transfer pricing system. James’ MIS
department is currently negotiating a transfer price for its services with the four producing divisions of the
company as well as the marketing department. Charges will be assessed based on number of reports
(assume that all reports require the same amount of time and resources to produce). The cost to operate
the MIS department at its full capacity of 1,000 reports per year is budgeted at $45,000. The user subunits
expect to request 250 reports each this year. The cost of temporary labor and additional facilities used
to produce reports beyond capacity is budgeted at $48.00 per report. James could purchase the same
services from an external Information Services firm for $70,000. What amounts should be used as the
ceiling and the floor in determining the negotiated transfer price?
a. b. c. d.
Floor $36.00 $45.60 $48.00 $57.00
Ceiling $56.00 $56.00 $70.00 $82.00

Questions 77 thru 80 are based on the following information. Barfield

Bigole Corp. produces various products used in the construction industry. The Plumbing Division produces
and sells 100,000 copper fittings each month. Relevant information for last month follows:
Total sales (all external) $250,000
Expenses (all on a unit base):
Variable manufacturing $0.50
Fixed manufacturing .25
Variable selling .30
Fixed selling .40
Variable G&A .15
Fixed G&A .50
Total $2.10
Top-level managers are trying to determine how a transfer price can be set on a transfer of 10,000 of the
copper fittings from the Plumbing Division to the Bathroom Products Division.
77. A transfer price based on variable cost will be set at ___________ per unit.
a. $0.50 c. $0.95
b. $0.80 d. $0.75

78. A transfer price based on full production cost would be set at ___________ per unit.
a. $0.75 c. $1.45
b. $2.10 d. $1.60

79. A transfer price based on market price would be set at ___________ per unit.
a. $2.10 c. $1.60
b. $2.50 d. $2.25

80. If the Plumbing Division is operated as an autonomous investment center and its capacity is 100,000
fittings per month, the per-unit transfer price is not likely to be below
a. $0.75. c. $2.10.
b. $1.60. d. $2.50.

Operating at Full Capacity

Minimum Transfer Price
81. The High Division of Para Company produces a high quality kite. Unit production costs (based on capacity
production of 100,000 units per year) follow:
Direct materials P 60
Direct labor 25
Overhead (20% variable) 15
Other information
Sales price 120
Selling expenses (15% variable) 20
The High Division is producing and selling at capacity.
What is the minimum selling price that the division would consider as a “transfer price” to the Recreation
Division on which no variable period costs would be incurred? (M)
a. P120 c. P 91
b. P 88 d. P117 Pol Bobadilla

82. The Motor Division of Super Truck Co. uses 5,000 carburetors per month in its production of automotive
engines. It presently buys all of the carburetors it needs from two outside suppliers at an average cost of
$100. The Carburetor Division of Super Truck Co. manufactures the exact type of carburetor that the
Motor Division requires. The Carburetor Division is presently operating at its capacity of 15,000 units per
month and sells all of its output to a foreign car manufacturer at $106 per unit. Its cost structure (on 15,000
units) is:
Variable production costs $70
Variable selling costs 10
All fixed costs 10
Assume that the Carburetor Division would not incur any variable selling costs on units that are transferred
internally. What is the minimum of the transfer price range for a transfer between the two divisions? (M)
a. $96 c. $70
b. $90 d. $106 Barfield

83. Division A produces a part with the following characteristics:

Capacity in units 50,000
Selling price per unit $30
Variable costs per unit $18
Fixed costs per unit $3
Division B, another division in the company, would like to buy this part from Division A. Division B is
presently purchasing the part from an outside source at $28 per unit. If Division A sells to Division B, $1
in variable costs can be avoided.
 Suppose Division A is currently operating at capacity and can sell all of the units is produces on the
outside market for its usual selling price. From the point of view of Division A, any sales to Division B
should be priced no lower than: (M)
a. $27. c. $20.
b. $29. d. $28. G & N 9e

Maximum Transfer Price

84. The Motor Division of Super Truck Co. uses 5,000 carburetors per month in its production of automotive
engines. It presently buys all of the carburetors it needs from two outside suppliers at an average cost of
$100. The Carburetor Division of Super Truck Co. manufactures the exact type of carburetor that the
Motor Division requires. The Carburetor Division is presently operating at its capacity of 15,000 units per
month and sells all of its output to a foreign car manufacturer at $106 per unit. Its cost structure (on 15,000
units) is:
Variable production costs $70
Variable selling costs 10
All fixed costs 10
 Assume that the Carburetor Division would not incur any variable selling costs on units that are transferred
internally. What is the maximum of the transfer price range for a transfer between the two divisions? (M)
a. $106 c. $90
b. $100 d. $70 Barfield

Effect on Profit - Make

85. Division A makes a part with the following characteristics:
Production capacity in units 15,000 units
Selling price to outside customers $25
Variable cost per unit $18
Total fixed costs $60,000
Division B, another division of the same company, would like to purchase 5,000 units of the part each
period from Division A. Division B is now purchasing these parts from an outside supplier at a price of
$24 each.
Suppose that Division A is operating at capacity and can sell all of its output to outside customers at its
usual selling price. If Division A sells the parts to Division B at $24 per unit (Division B’s outside price),
the company as a whole will be: (M)
a. better off by $5,000 each period.
b. worse off by $15,000 each period,
c. worse off by $5,000 each period.
d. there will be no change in the status of the company as a whole. G & N 9e

86. The Motor Division of Super Truck Co. uses 5,000 carburetors per month in its production of automotive
engines. It presently buys all of the carburetors it needs from two outside suppliers at an average cost of
$100. The Carburetor Division of Super Truck Co. manufactures the exact type of carburetor that the
Motor Division requires. The Carburetor Division is presently operating at its capacity of 15,000 units per
month and sells all of its output to a foreign car manufacturer at $106 per unit. Its cost structure (on 15,000
units) is:
Variable production costs $70
Variable selling costs 10
All fixed costs 10
Assume that the Carburetor Division would not incur any variable selling costs on units that are transferred
internally.
If the two divisions agree to transact with one another, corporate profits will (M)
a. drop by $30,000 per month.
b. rise by $20,000 per month.
c. rise by $50,000 per month.
d. rise or fall by an amount that depends on the level of the transfer price. Barfield

Comprehensive
Questions 87 and 88 are based on the following information. RPCPA 0585
Rosas Corporation has several operating divisions. Three divisions are treated as profit centers and its
division managers are free to choose their sources of sale and supply. One of its divisions, Gumamela
Division, manufactures steel containers, 20% of which are sold to Daisy Division and the balance to outside
customers. Inter-divisional sales and purchases are recorded at variable cost as a transfer price. Based on
a full capacity of 150,000 units, the estimated sales and standard cost data for Gumamela Division for the
year 1985 are as follows:
Daisy Outsiders
Sales P 900,000 P 9,600,000
Variable costs (900,000) (3,600,000)
Fixed costs (200,000) (800,000)
Gross margin P(200,000) P 5,200,000
Unit sales 30,000 120,000
Gumamela has the option to sell the above 30,000 units to an outside customer at a price of P50 per unit
during 1985 on a continuing basis. Daisy in turn may purchase its requirements from an outside supplier at a
price of P60 per unit.
87. Assuming that Gumamela wishes to improve its gross margin, should Gumamela accept the order of the
new customer, and drop its sales to Daisy for 1985 and why? (M)
a. No, because the gross margin from the company’s overall viewpoint would decrease by P300,000.
b. Yes, because Gumamela Division’s gross margin would increase by P300,000.
c. Yes, because Gumamela Division’s gross margin would increase by P600,000.
d. No, because Daisy Division’s gross margin would decrease by P900,000.

88. Assume, however, that Rosa Corporation allows the division managers to negotiate the transfer price for
1985. The managers agreed on a tentative transfer price of P50 per unit; to be reduced based on an
equal sharing of the additional gross margin to Gumamela resulting from the sales to Daisy of 30,000
units at P50 per unit. The actual transfer price for 1985 would be (M)
a. P35.50 c. P45.00
b. P40.00 d. P50.00
Questions 89 thru 91 are based on the following information. CMA 0696 3-26 to 28
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 below.
Plastic Components Video Cards
Direct material $ 1.25 $ 2.40
Direct labor 2.35 3.00
Variable overhead 1.00 1.50
Fixed overhead 0.40 2.25
Total cost $ 5.00 $ 9.15

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.

89. A per-unit transfer price from the Video Cards Division to the Entertainment Division at full cost, $9.15,
would (M)
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.

90. 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 (M)
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.

91. Assume that the Plastic Division has excess capacity and it has negotiated a transfer price of $5.60 per
plastic component with the Entertainment Division. This price will (M)
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.

Operating with Partial Excess Capacity

Minimum Transfer Price
92. Division X of Charter Corporation makes and sells a single product which is used by manufacturers of
fork lift trucks. Presently it sells 12,000 units per year to outside customers at $24 per unit. The annual
capacity is 20,000 units and the variable cost to make each unit is $16. Division Y of Charter Corporation
would like to buy 10,000 units a year from Division X to use in its products. There would be no cost
savings from transferring the units within the company rather than selling them on the outside market.
What should be the lowest acceptable transfer price from the perspective of Division X? (D)
a. $24.00 c. $17.60
b. $21.40 d. $16.00 G & N 9e

93. The Post Division of the M.T. Woodhead Company produces basic posts which can be sold to outside
customers or sold to the Lamp Division of the M.T. Woodhead Company. Last Year the Lamp Division
bought all of its 25,000 posts from Post at $1.50 each. The following data are available for last year's
activities of the Post Division:
Capacity in units 300,000 posts
Selling price per post to outside customers $1.75
Variable costs per post $0.90
Fixed costs, total $150,000
Suppose the transfers of posts to the Lamp Division cut into sales to outside customers by 15,000 units.
What is the lowest transfer price that would not reduce the profits of the Post Division? (D)
a. $0.90. c. $1.41.
b. $1.35. d. $1.75. G & N 9e
94. The Vega Division of Ace Company makes wheels which can either be sold to outside customers or
transferred to the Walsh Division of Ace Company. Last month the Walsh Division bought all 4,000 of its
wheels from the Vega Division for $42 each. The following data are available from last month's operations
for the Vega Company:
Capacity 12,000 wheels
Selling price per wheel to outside customers $45
Variable costs per wheel when sold to outside customers $30
If the Vega Division sells wheels to the Walsh Division, Vega can avoid $2 per wheel in sales
commissions. An outside supplier has offered to supply wheels to the Walsh Division for $41 each.
Suppose that Vega can sell 9,000 wheels each month to outside consumers, so transfers to the Walsh
Division cut into outside sales. What should be the lowest acceptable transfer price from the perspective
of the Vega Division? (VD)
a. $28.00 c. $41.00
b. $31.75 d. $42.00 G & N 9e

Effect on Profit - Make

95. Division P of Turbo Corporation has the capacity for making 75,000 wheel sets per year and regularly
sells 60,000 each year on the outside market. The regular sales price is $100 per wheel set, and the
variable production cost per unit is $65. Division Q of Turbo Corporation currently buys 20,000 wheel sets
(of the kind made by Division P) yearly from an outside supplier at a price of $90 per wheel set. If Division
Q were to buy the 30,000 wheel sets it needs annually from Division P at $87 per wheel set, the change
in annual net operating income for the company as a whole, compared to what it is currently, would be:
(D)
a. $225,000. c. $500,000.
b. $325,000 d. $75,000. G & N adapted

Effect on Profit - Buy

96. The Post Division of the M.T. Woodhead Company produces basic posts which can be sold to outside
customers or sold to the Lamp Division of the M.T. Woodhead Company. Last Year the Lamp Division
bought all of its 25,000 posts from Post at $1.50 each. The following data are available for last year's
activities of the Post Division:
Capacity in units 300,000 posts
Selling price per post to outside customers $1.75
Variable costs per post $0.90
Fixed costs, total $150,000
Suppose the transfers of posts to the Lamp Division cut into sales to outside customers by 15,000 units.
Further suppose that an outside supplier is willing to provide the Lamp Division with basic posts at $1.45
each. If the Lamp Division had chosen to buy all of its posts from the outside supplier instead of the Post
Division, the change in net operating income for the company as a whole would have been: (D)
a. $1,250 decrease. c. $1,000 decrease.
b. $10,250 increase. d. $13,750 decrease. G & N 9e

Operating at Idle Capacity

Minimum Transfer Price
97. Division A makes a part that it sells to customers outside of the company. Data concerning this part
appear below:
Selling price to outside customers $40
Variable cost per unit $30
Total fixed costs $10,000
Capacity in units 20,000
Division B of the same company would like to use the part manufactured by Division A in one of its
products. Division B currently purchases a similar part made by an outside company for $38 per unit and
would substitute the part made by Division A. Division B requires 5,000 units of the part each period.
Division A has ample capacity to produce the units for Division B without any increase in fixed costs and
without cutting into sales to outside customers. If Division A sells to Division B rather than to outside
 customers, the variable cost be unit would be $1 lower. What should be the lowest acceptable transfer
price from the perspective of Division A? (M)
a. $40. c. $30.
b. $38. d. $29. G & N 9e

98. Division A produces a part with the following characteristics:

Capacity in units 50,000
Selling price per unit $30
Variable costs per unit $18
Fixed costs per unit $3
Division B, another division in the company, would like to buy this part from Division A. Division B is
presently purchasing the part from an outside source at $28 per unit. If Division A sells to Division B, $1
in variable costs can be avoided.
Suppose that Division A has ample idle capacity to handle all of Division B's needs without any increase
in fixed costs and without cutting into its sales to outside customers. From the point of view of Division A,
any sales to Division B should be priced no lower than: (M)
a. $29. c. $18.
b. $30. d. $17. G & N 9e
Maximum Transfer Price
99. Cline Company had the following historical accounting data per unit:
Direct materials $20
Direct labor 10
Variable manufacturing overhead 5
Fixed manufacturing overhead 8
Variable selling expenses 15
Fixed selling expenses 3
The units are normally transferred internally from Division X to Division Y. The units also may be sold
externally for $70 per unit. The minimum profit level accepted by the company is a markup of 30 percent.
There were no beginning or ending inventories.
If the negotiated price is used, Division X’s transfer price should be
a. a maximum of $70.00 d. a minimum of $40.00
b. a minimum of $51.00 e. a minimum of $43.00.
c. a maximum of $66.30 H&M

Minimum & Maximum Transfer Price

Questions 100 & 101 are based on the following information. G & N 9e
The Vega Division of Ace Company makes wheels which can either be sold to outside customers or
transferred to the Walsh Division of Ace Company. Last month the Walsh Division bought all 4,000 of its
wheels from the Vega Division for $42 each. The following data are available from last month's operations for
the Vega Company:

Capacity 12,000 wheels

Selling price per wheel to outside customers $45
Variable costs per wheel when sold to outside customers $30

If the Vega Division sells wheels to the Walsh Division, Vega can avoid $2 per wheel in sales commissions.
An outside supplier has offered to supply wheels to the Walsh Division for $41 each.

100. Suppose that the Vega Division has ample idle capacity so that transfers to the Walsh Division would not
cut into its sales to outside customers. What should be the lowest acceptable transfer price from the
perspective of the Vega Division? (M)
a. $28 c. $42
b. $30 d. $45
101. What is the maximum price per wheel that Walsh should be willing to pay Vega? (M)
a. $28 c. $42
b. $41 d. $45 G & N 9e

Optimal Transfer Price

102. Division Z of a company produces a component that it currently sells to outside customers for $20 per
unit. At its current level of production, which is 60% of capacity, Division Z's fixed cost of producing this
component is $5 per unit and its variable cost is $12 per unit. Division Y of the same company would like
to purchase this component from Division Z for $10. Division Z has enough excess capacity to fill Division
Y's requirements. The managers of both divisions are compensated based upon reported profits. Which
of the following transfer prices will maximize total company profits and be most equitable to the managers
of Division Y and Division Z? (M)
A. $12 per unit. C. $20 per unit.
B. $18 per unit. D. $22 per unit. CIA 0592 IV-19

103. Nita Corp’s Department 1 produced component C that is used by OZM as a key part. Production and
sales data for component C is as follows:

Selling price per unit P100

Variable cost per unit 36
Fixed cost per unit (based on 10,000 annual capacity) 24

Nita Corp.’s Department II is introducing a new product that will use component C. An outside supplier
has quoted Department II a price of P96 per unit. This represents the usual P100 price less a quantity
discount due to the large number of Department II’s requirements.
The Company has transfer price formula of: Transfer price = Variable cost per unit + Lost contribution
margin per unit on outside sales.
Department I has enough excess capacity to handle all of Department II’s needs. For the overall interest
of the company, Department I should (M)
a. Sell to Department II at the same quoted price of P96 per unit.
b. Sell to Department II at minimum price of P60 per unit.
c. Not sell to Department II since it will lose P4 per unit.
d. Sell to Department II at P100 per unit. RPCPA 1096
104. A company has two divisions, A and B, each operated as a profit center. A charges B $35 per unit for
each unit transferred to B. Other data follows:

A’s variable cost per unit $30

A’s fixed costs 10,000
A’s annual sales to B 5,000 units
A’s sales to outsiders 50,000 units

A is planning to raise its transfer price to $50 per unit, Division B can purchase units at $40 each from
outsiders, but doing so would idle A’s facilities 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? (M)
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 from outside vendors.
d. Division A, despite the increased transfer price. CIA 1183 IV-5

Effect on Profit
Questions 105 & 106 are based on the following information. L & H 10e
Alcatraz Division of XYZ Corp. sells 80,000 units of part X to the outside market. Part X sells for $40, has a
variable cost of $22, and a fixed cost per unit of $10. Alcatraz has a capacity to produce 100,000 units per
period. Capone Division currently purchases 10,000 units of part X from Alcatraz for $40. Capone has been
approached by an outside supplier willing to supply the parts for $36.

105. What is the effect on XYZ's overall profit if Alcatraz REFUSES the outside price and Capone decides to
buy outside? (M)
a. no change c. $80,000 decrease in XYZ profits
b. $140,000 decrease in XYZ profits d. $40,000 increase in XYZ profits

106. What is the effect on XYZ's overall profit if Alcatraz ACCEPTS the outside price and Capone continues
to buy inside? (M)
a. no change c. $80,000 decrease in XYZ profits
b. $140,000 decrease in XYZ profits d. $40,000 increase in XYZ profits
107. Division A makes a part with the following characteristics:

Production capacity in units 15,000 units

Selling price to outside customers $25
Variable cost per unit $18
Total fixed costs $60,000

Division B, another division of the same company, would like to purchase 5,000 units of the part each
period from Division A. Division B is now purchasing these parts from an outside supplier at a price of
$24 each.

Suppose that Division A has ample idle capacity to handle all of Division B's needs without any increase
in fixed costs and without cutting into sales to outside customers. If Division B continues to purchase
parts from an outside supplier rather then from Division A, the company as a whole will be: (M)
G & N 9e
a. worse off by $30,000 each period. c. better off by $15,000 each period.
b. worse off by $10,000 each period. d. worse off by $35,000 each period.

International Transfer Pricing

108. Hancock Manufacturing has one plant located in Italy and another plant located in the U.S. The Italian
plant manufactures a component used in a finished product manufactured at the U.S. plant. Currently,
the Italian plant is operating at 75 percent capacity. In Italy the income tax rate is 32 percent; in the U.S.
the corporate income tax rate is 35 percent.

The market price of the component is $120 and the Italian plant’s costs to manufacture the component
are as follows:

Direct materials $30

Direct labor 20
Variable overhead 10
Fixed overhead 15
Which transfer price would be in the best interest of the overall corporation?
a. $60 c. $75
b. $50 d. $120 H&M
109. Pacific Company has three plants: one located in Malaysia, one in India and another plant located in the
Philippines. Both plants manufactures a component used in a finished product manufactured in the
Philippine plant. Currently, both plants are operating at 70% capacity. In Malaysia the income tax rate
is 42% while in India the tax rate is 35%; in the Philippines, the corporate income tax rate is 40%.

The market price of the component, in peso equivalent, is P100 and the foreign plant’s costs to
manufacture the component are as follows:

Direct materials P10

Direct labor 20
Variable overhead 5
Fixed overhead 25

Which transfer price would be in the best interest of the overall corporation?
Pol Bobadilla A. B. C. D.
Malaysia P35 P 35 P100 P100
India P35 P100 P100 P 35

Questions 110 thru 112 are based on the following information. H&M
Hanover Manufacturing has one plant located in Belgium and another plant located in the U.S. The Belgium
plant manufactures a component used in a finished product manufactured at the U.S. plant. Currently, the
Belgium plant is operating at 70 percent capacity. In Belgium the income tax rate is 42 percent; in the U.S.
the corporate income tax rate is 35 percent.

The market price of the component is $100 and the Belgium plant’s costs to manufacture the component are
as follows:

Direct materials $10

Direct labor 20
Variable overhead 5
Fixed overhead 25

110. What is the minimum transfer price that the Belgium division would be willing to accept?
a. $35 c. $60
b. $55 d. $100
111. What is the maximum transfer price that the U.S. division would be willing to pay?
a. $35 c. $60
b. $55 d. $100

112. Which transfer price would be in the best interest of the overall corporation?
a. $35 c. $60
b. $55 d. $100

Questions 113 thru 115 are based on the following information. H&M
Hampton Manufacturing has one plant located in Belgium and another plant located in the U.S. The Belgium
plant manufactures a component used in a finished product manufactured at the U.S. plant. Currently, the
Belgium plant is operating at 70 percent capacity. In Belgium the income tax rate is 30 percent; in the U.S.
the corporate income tax rate is 35 percent.

The market price of the component is $140 and the Belgium plant’s costs to manufacture the component are
as follows:

Direct materials $15

Direct labor 25
Variable overhead 6
Fixed overhead 28

113. What is the minimum transfer price that the Belgium division would be willing to accept?
a. $140 c. $68
b. $74 d. $46

114. What is the maximum transfer price that the U.S. division would be willing to pay?
a. $140 c. $68
b. $74 d. $46

115. Which transfer price would be in the best interest of the overall corporation?
a. $140 c. $68
b. $74 d. $46
Comprehensive
Questions 116 through 118 are based on the following information. CMA 1290 3-21 to 23
Adler Industries is a vertically integrated firm with several divisions that operate as decentralized profit centers.
Adler's Systems Division manufactures scientific instruments and uses the products of two of Adler's other
divisions. The Board Division manufactures printed circuit boards (PCBs). One PCB model is made
exclusively for the Systems Division using proprietary designs, whereas less complex models are sold in
outside markets. The products of the Transistor Division are sold in a well-developed competitive market;
however, one transistor model is also used by the Systems Division.

The costs per unit of the products used by the Systems Division are as follows:
PCB Transistor
Direct materials $2.50 $ .80
Direct labor 4.50 1.00
Variable overhead 2.00 .50
Fixed overhead .80 .75
Total cost $9.80 $3.05

The Board Division sells its commercial products at full cost plus a 25% markup and believes the proprietary
board made for the Systems Division would sell for $12.25 per unit on the open market. The market price of
the transistor used by the Systems Division is $3.70 per unit.

116. A per unit transfer price from the Transistor Division to the Systems Division at full cost, $3.05, would
A. Allow evaluation of both divisions on a competitive basis.
B. Satisfy the Transistor Division's profit desire by allowing recovery of opportunity costs.
C. Demotivate the Systems Division and cause mediocre performance.
D. Provide no profit incentive for the Transistor Division to control or reduce costs.

117. Assume the Systems Division is able to purchase a large quantity of transistors from an outside source
at $2.90 per unit. The Transistor Division, having excess capacity, agrees to lower its transfer price to
$2.90 per unit. This action would
A. Optimize the profit goals of the Systems Division while subverting the profit goals of Adler Industries.
B. Allow evaluation of both divisions on the same basis.
C. Subvert the profit goals of the Transistor Division while optimizing the profit goals of the Systems
Division.
D. Optimize the overall profit goals of Adler Industries.
118. The Board and Systems Divisions have negotiated a transfer price of $11.00 per printed circuit board.
This price will
A. Cause the Board Division to reduce the number of commercial printed circuit boards it manufactures.
B. Motivate both divisions as estimated profits are shared.
C. Encourage the Systems Division to seek an outside source for printed circuit boards.
D. Demotivate the Board Division causing mediocre performance.

Questions 119 through 123 are based on the following information. Barfield
Office Products Inc. manufactures and sells various high-tech office automation products. Two divisions of
Office Products Inc. are the Computer Chip Division and the Computer Division. The Computer Chip Division
manufactures one product, a "super chip," that can be used by both the Computer Division and other external
customers. The following information is available on this month's operations in the Computer Chip Division:

Selling price per chip $50

Variable costs per chip $20
Fixed production costs $60,000
Fixed SG&A costs $90,000
Monthly capacity 10,000 chips
External sales 6,000 chips
Internal sales 0 chips

Presently, the Computer Division purchases no chips from the Computer Chips Division, but instead pays $45
to an external supplier for the 4,000 chips it needs each month.

119. Assume that next month's costs and levels of operations in the Computer and Computer Chip Divisions
are similar to this month. What is the minimum of the transfer price range for a possible transfer of the
super chip from one division to the other?
a. $50 c. $20
b. $45 d. $35

120. Assume that next month's costs and levels of operations in the Computer and Computer Chip Divisions
are similar to this month. What is the maximum of the transfer price range for a possible transfer of the
chip from one division to the other?
a. $50 c. $35
b. $45 d. $30

121. Two possible transfer prices (for 4,000 units) are under consideration by the two divisions: $35 and $40.
Corporate profits would be _______ if $35 is selected as the transfer price rather than $40.
a. $20,000 larger c. $20,000 smaller
b. $40,000 larger d. the same

122. If a transfer between the two divisions is arranged next period at a price (on 4,000 units of super chips)
of $40, total profits in the Computer Chip division will
a. rise by $20,000 compared to the prior period.
b. drop by $40,000 compared to the prior period.
c. drop by $20,000 compared to the prior period.
d. rise by $80,000 compared to the prior period.

123. Assume, for this question only, that the Computer Chip Division is selling all that it can produce to external
buyers for $50 per unit. How would overall corporate profits be affected if it sells 4,000 units to the
Computer Division at $45? (Assume that the Computer Division can purchase the super chip from an
outside supplier for $45.)
a. no effect c. $20,000 decrease
b. $20,000 increase d. $90,000 increase
Questions 124 thru 126 are based on the following information. Barfield
The Motor Division of Super Truck Co. uses 5,000 carburetors per month in its production of automotive
engines. It presently buys all of the carburetors it needs from two outside suppliers at an average cost of $100.
The Carburetor Division of Super Truck Co. manufactures the exact type of carburetor that the Motor Division
requires. The Carburetor Division is presently operating at its capacity of 15,000 units per month and sells all
of its output to a foreign car manufacturer at $106 per unit. Its cost structure (on 15,000 units) is:

Variable production costs $70

Variable selling costs 10
All fixed costs 10

Assume that the Carburetor Division would not incur any variable selling costs on units that are transferred
internally.

124. What is the maximum of the transfer price range for a transfer between the two divisions?
a. $106 c. $90
b. $100 d. $70
125. What is the minimum of the transfer price range for a transfer between the two divisions?
a. $96 c. $70
b. $90 d. $106

126. If the two divisions agree to transact with one another, corporate profits will
a. drop by $30,000 per month.
b. rise by $20,000 per month.
c. rise by $50,000 per month.
d. rise or fall by an amount that depends on the level of the transfer price.

Questions 127 through 133 are based on the following information. Gleim
The information was presented as part of Question 6 on Part 4 of the December 1981 CMA Examination.
PortCo Products is a divisionalized furniture manufacturer. The divisions are autonomous segments, with
each division being responsible for its own sales, costs of operations, working capital management, and
equipment acquisition. Each division serves a different market in the furniture industry. Because the markets
and products of the divisions are so different, there have never been any transfers between divisions.

The Commercial Division manufactures equipment and furniture that are purchased by the restaurant industry.
The division plans to introduce a new line of counter and chair units that feature a cushioned seat for the
counter chairs. John Kline, the division manager, has discussed the manufacturing of the cushioned seat with
Russ Flegel for a price for 100-unit lots of the cushioned seat. The following conversation took place about
the price to be charged for the cushioned seats:

Flegel: “John, we can make the necessary modifications to the cushioned seat easily. The raw materials
used in your seat are slightly different and should cost about 10% more than those used in our deluxe office
stool. However, the labor time should be the same because the seat fabrication operation basically is the
same. I would price the seat at our regular rate – full cost plus 30% markup.”
Kline: “This is higher than I expected. Russ, I was thinking that a good price would be your variable
manufacturing costs. After all, your capacity costs will be incurred regardless of the job.”
Flegel: “John, I’m at capacity. By making the cushion seats for you, I’ll have to cut my production of deluxe
office stools. Of course, I can increase my production of economy office stools. The labor time freed by not
having to fabricate the frame or assemble the deluxe stool can be shifted to the frame fabrication and assembly
of the economy office stool. Fortunately, I can switch my labor force between these two models of stools
without any loss of efficiency. As you know, overtime is not a feasible alternative in our community. I’d like
to sell it to you at variable cost, but I have excess demand for both products. I don’t mind changing my product
mix to the economy model if I get a good return on the seats I make for you. Here are my standard costs for
the two stools and a schedule of my manufacturing overhead.”

Kline: “I guess I see your point, Russ, but I don’t want to price myself out of the market. Maybe we should
talk to Corporate to see if they can give us any guidance.”
Office Division
Standard Costs and Prices

Deluxe Office Stool Economy Office Stool

Raw materials
Framing $ 8.15 $ 9.76
Cushioned seat
Padding 2.40 -
Vinyl 4.00 -
Molded seat (purchased) 6.00
Direct labor
Frame fabrication (.5x$7.50/DLH) 3.75 (.5x$7.50/DLH) 3.75
Cushion fabrication 3.75 -
(.5x$7.50/DLH)
Assembly* (.5x$7.50/DLH) 3.75 (.3x$7.50/DLH) 2.25
Manufacturing
Overhead (1.5DLHx$12.60/DLH) 19.20 (.8DLHx$12.80/DLH) 10.24
Total standard cost $45.00 $32.00
 Selling price (30% markup) $58.50 $41.60
* Attaching seats to frames and attaching rubber feet.

Office Division
Manufacturing Overhead Budget

Overhead Item Nature Amount

Supplies Variable – at current market prices $ 420,000
Indirect labor Variable 375,000
Supervision Nonvariable 250,000
Power Use varies with activity; rates are fixed 180,000
Heat and light Nonvariable – light is fixed regardless of production 140,000
while heat/airconditioning varies with fuel charges
Property taxes and Nonvariable – any change in amounts/rates is 200,000
insurance taxes independent of production
Depreciation Fixed dollar total 1,700,000
Employee benefits 20% of supervision, direct and indirect labor 575,000
Total overhead $3,840,000
Capacity in DLH 300,000
Overhead rate/DLH $12.80
127. What amount of employee benefit is associated with direct labor costs? (E)
a. $675,000 c. $450,000
b. $75,000 d. $500,000

128. What is the variable manufacturing overhead rate? (E)

a. $7.80/hr. c. $5.17/hr.
b. $11.25/hr. d. $5.00/hr.

129. What is the transfer price per 100-unit lot based on variable manufacturing costs to produce the modified
cushioned seat? (E)
a. $1,329 c. $789
b. $1,869 d. $1,986

130. What is the fixed manufacturing overhead rate? (E)

a. $7.80/hr. c. $5.17/hr.
b. $11.25/hr. d. $5.00/hr.

131. How many economy office stools can be produced with the labor hours currently used to make 100 deluxe
stools? (E)
a. 187 c. 100
b. 125 d. 150

132. When computing the opportunity cost for the deluxe office stool, what is the contribution margin per unit
produced? (E)
a. $25.20 c. $45.00
b. $15.84 d. $33.30

133. What is the opportunity cost of the Office Division if 125 economy stools can be made in the time required
for 100 deluxe stools? (E)
a. $789 c. $1,329
b. $1,869 d. $540