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1. The amounts charged for goods and services exchanged between two divisions are known as:
a. target prices.
b. transfer prices.
c. standard variable costs.
d. residual prices.
2. A product may be passed from one subunit to another subunit in the same organization. The product is
known as
a. an interdepartmental product.
b. an intermediate product.
c. a subunit product.
d. a transfer product
3. A transfer pricing system is also known as
a. investment center accounting.
b. a revenue allocation system.
c. responsibility accounting.
d. a charge-back system.
4. The maximum of the transfer price negotiation range is
a. determined by the buying division.
b. set by the selling division.
c. influenced only by internal cost factors.
d. negotiated by the buying and selling division.
5. To avoid waste and maximize efficiency when transferring products among divisions in a competitive
economy, a large diversified corporation should base transfer prices on
a. variable cost.
b. market price.
c. full cost.
d. production cost.
6. An internal reconciliation account is not required for internal transfers based on
a. market value.
b. dual prices.
c. negotiated prices.
d. cost.
7. Top management can preserve the autonomy of division managers and encourage an optimal level of
internal transactions by
a. selecting performance evaluation measures that are consistent with the achievement of overall
corporate goals.
b. selecting division managers who are most concerned about their individual performance.
c. prescribing transfer prices between segments.
d. setting up all organizational units as revenue centers.
8. Suddath Corporation has no excess capacity. If the firm desires to implement the general transfer-pricing
rule, opportunity cost would be equal to:
a. zero.
b. the direct expenses incurred in producing the goods.
c. the total difference in the cost of production between two divisions.
d. the contribution margin forgone from the lost external sale.
9. Negotiated transfer prices are often employed when
a. market prices are stable.
b. market prices are volatile.
c. market prices change by a regular percentage each year.
d. goal congruence is not a major objective.
10. Suddath Corporation has no excess capacity. If the firm desires to implement the general transfer-pricing
rule, opportunity cost would be equal to:
a. zero.
b. the direct expenses incurred in producing the goods.
c. the total difference in the cost of production between two divisions.
d. the contribution margin forgone from the lost external sale.
11. The biggest challenge in making a decentralized organization function effectively is:
A. earning maximum profits through fair practices.
B. minimizing losses.
C. taking advantage of the specialized knowledge and skills of highly talented managers.
D. obtaining goal congruence among division managers.
E. developing an adequate budgetary control system.
12. Which of the following describes the goal that should be pursued when setting transfer prices?
A. Maximize profits of the buying division.
B. Maximize profits of the selling division.
C. Allow top management to become actively involved when calculating the proper dollar amounts.
D. Establish incentives for autonomous division managers to make decisions that are in the overall
organization's best interests (i.e., goal congruence).
E. Minimize opportunity costs.
13. A general calculation method for transfer prices that achieves goal congruence begins with the additional
outlay cost per unit incurred because goods are transformed and then
A. adds the opportunity cost per unit to the organization because of the transfer.
B. subtracts the opportunity cost per unit to the organization because of the transfer.
C. adds the sunk cost per unit to the organization because of the transfer.
D. subtracts the sunk cost per unit to the organization because of the transfer.
E. adds the sales revenue per unit to the organization because of the transfer.
14. Computer Solutions Corporation 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:
Presently, the Computer Division purchases no chips from the Computer Chips Division, but instead pays
P45 to an external supplier for the 4,000 chips it needs each month.
Refer to Computer Solutions Corporation. 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 transfer price range for a possible
transfer of the super chip from one division to the other?
15. The Motor Division of Dynamic Engine Corporation 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
P100. The Carburetor Division of Dynamic Engine Corporation 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 P106 per unit. Its cost structure (on 15,000 units) is:
16. Watts Corporation 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:
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.
Refer to Watts Corporation. A transfer price based on full production cost would be set at ___________ per
unit.
Las:
Selling price per wheel to outside customers P45
Variable costs per wheel when sold to
outside customers P30
Capacity in wheels 12,000
Wheels sold to outside customers 6,000
Vegas:
Number of wheels needed per month 4,000
Price per wheel pain to an outside supplier P42
If Las sells wheels to Vegas, Las can avoid P2 per wheel in sales commissions.
Suppose that Las sells 9,000 wheels each month to outside consumers. If the transfer pricing formula is used to find
the transfer price, what is the appropriate price per wheel?
a. P29.50 c. P39.25
b. P31.75 d. P42.00
Calculate the Division operating income for the Steps Company – which manufactures only on type of shoe and has
two divisions – the Parts Division and the Production Division. The Parts Division manufactures soles for the
Production Division, which completes the shoe and sell it to retailers. The Parts Division “sells” soles to the
Production Division. The market price for the Production Division to purchase a pair of soles is P20. (Ignore
changes in inventory). The fixed costs for the Parts Division are assumed to be the same over the range: 40,000 –
100,000 units. The fixed costs for the Production Division are assumed to be P7 per pair at 100,000 units.
Direct materials P6
Direct labor P2
Variable overhead P1
Division fixed costs P7
27. What is the transfer price per pair of soles from the Parts Division to the Production if the method used to place a
value on each pair of soles is 180% of variable costs?
a. P9 c. P16.20
b. P10 d. P18
28. What is the transfer price per pair of soles from the Parts Division to the Production Division per pair of soles if
the transfer price per pair of soles is 125% of full costs?
a. P10 c. P13
b. P12.50 d. P15
29. Calculate the difference in overall corporate net income if the Production Division sells 100,000 pairs of shoes at
a price per pair of shoes of P60 under Scenario A and Scenario B:
Scenario A – transfer price – negotiated P15 per pair of soles
Scenario B – transfer price is market price.
a. P500,000 more under Scenario A
b. P500,000 – under Scenario B
c. P100,000 under Scenario A
d. None of the above
30. If the transfer price for a pair of soles is 180% of total costs of the Parts department, and 40,000 of soles are
produced and transferred to the Production department, the Parts Division’s operating income is:
a. P320,000 c. P400,000
b. P360,000 d. P440,000
31. If the Assembly division sells 100,000 pairs of shoes at a price of P60 a pair, what is the net income of both
divisions together?
a. P4,400,000
b. P3,400,000
c. P3,000,000
d. P2,600,000