Responsibility Accounting and Transfer Pricing

(A. Decentralization and Performance Evaluation)

MODULE 7 C. both make and implement key decisions

D. review the outcomes of key decisions only
RESPONSIBILITY ACCOUNTING AND TRANSFER PRICING
7. Decentralization occurs when
A. the firm’s operations are located over a large geographic area to
A. DECENTRALIZATION AND PERFORMANCE EVALUATION reduce risk
B. authority for important decisions is delegated to lower segments
of the organization
THEORIES: C. important decisions are made at the upper levels and the lower
Centralization vs. decentralization levels of the organization are responsible for implementing the
Centralization decisions
3. In a company with a centralized approach to responsibility D. none of the above
accounting, upper-level managers typically
A. make key decisions only Goal congruence, Suboptimization & management by
B. implement key decisions only objectives
C. both make and implement key decisions Goal congruence
D. review the outcomes of key decisions only 8. Consistency between goals of the firm and the goals of its
employees is:
Decentralization A. goal optimization C. goal congruence
1. Why would a company decentralize? B. goal conformance D. goal compensation
A. to train and motivate division managers
B. to focus top management’s attention to operating decisions [Link] congruence is most likely to result when
C. to allow division managers to concentrate on strategic planning A. reports to managers include all costs
D. all of the above B. managers’ behavior is affected by the criteria used to judge
their performance
2. Advantages of decentralization include all of the following except C. performance evaluation criteria encourage behavior in the
A. divisional management is able to react to changing market company’s best interests as well as in the manager’s best
conditions more rapidly than top management interests
B. divisional management is a source of personnel for promotion to D. a manager knows the criteria used to judge his or her
top management positions performance
C. decentralization can motivate divisional managers
D. decentralization permits divisional management to concentrate [Link] a manager takes an action that benefits his or her
on company-wide problems and long-range planning responsibility center, but not the company as a whole,
A. it is a non-controllable action
4. In a company with a decentralized approach to responsibility B. there is a lack of goal congruence
accounting, lower-level managers typically C. the center must be an artificial profit center
A. make key decisions only D. the manager should be fired
B. implement key decisions only
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Suboptimization B. Control accounting D. Budgetary accounting

19.A management decision may be beneficial for a given profit
center, but not for the entire company. From the overall company [Link] Atwood Company uses a performance reporting system that
viewpoint, this decision would lead to reflects the company’s decentralization of decision making. The
A. goal congruence C. centralization departmental performance report shows one line of data for each
B. suboptimization D. maximization subordinate who reports to the group vice-president. The data
presented shows the actual costs incurred during the period, the
Management by objectives budgeted costs, and all variances from budget for that
[Link] emphasis on obtaining goal congruence is consistent with a subordinate’s department. The Atwood Company is using a type of
broad managerial approach called system called
A. management by crisis A. Flexible budgeting C. Responsibility accounting
B. management by objectives B. Contribution budgeting D. Cost-benefit accounting
C. management through goal congruence
D. just-in-time philosophy [Link] accumulation of accounting data on the basis of the individual
manager who has the authority to make day-to-day decisions about
[Link] a responsibility accounting system, the process in which a activities in an area is called
supervisor and a subordinate jointly determine the subordinate’s A. static reporting. C. responsibility accounting.
goals and plans for achieving these goals is B. flexible accounting. D. master budgeting.
A. Top-down budgeting C. Bottom-up budgeting
B. Imposed budgeting D. Management by objectives [Link] of the following is critically important for a responsibility
accounting system to be effective?
Responsibility Accounting A. Each employee should receive a separate performance report.
5. Responsibility accounting is a system whose attributes include B. Service department costs should be allocated to the operating
A. responsibility, liability, and culpability departments that use the service.
B. liability, accountability, and performance evaluation C. Each manager should know the criteria used for evaluating his
C. performance evaluation, accountability, and responsibility or her performance.
D. culpability, liability, and accountability D. The details on the performance reports for individual managers
should add up to the totals on the report to their supervisor.
6. Some basic elements of responsibility accounting are
A. chart of accounts classificationC. control-based reports Responsibility report
B. budgeting system D. all of the above [Link] report to a territorial sales manager which shows the
contribution to profit by each salesperson in the territory is called
9. What term identifies an accounting system in which the operations A. a profit reportA. C. an absorption profit report
of the business are broken down into reportable segments and the B. a responsibility report D. a distribution report
control functions of a foreperson, sales managers, or supervisor is
emphasized? Responsibility centers
A. Responsibility accounting C. Operations-research 15.A responsibility center
accounting A. is an organization unit where management control exists over
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incurring costs or generating revenue B. a responsibility center that incurs costs and generates
B. is responsible for all other departments revenues.
C. has a responsible manager in charge of it C. evaluated by the rate of return earned on the investment
D. all of the above allocated to the center.
D. referred to as a loss center when operations do not meet the
Activity center company's objectives.
32.A segment of an organization for which management wants to
report the cost of the activities performed separately is called a(n) 22.A responsibility center having control over generating revenue is
A. cost center C. activity-based costing center A. a cost center C. a profit center
B. activity center D. batch activity center B. an investment center D. an operation center

Cost center Investment center

[Link] sequence that reflects increasing breadth of responsibility is 24.A distinguishing characteristic of an investment center is that
A. cost center, investment center, profit center A. revenues are generated by selling and buying stocks and
B. cost center, profit center, investment center bonds.
C. profit center, cost center, investment center B. interest revenue is the major source of revenues.
D. investment center, cost center, profit center C. the profitability of the center is related to the funds invested in
the center.
30.A cost center is used to D. it is a responsibility center which only generates revenues.
A. show responsibility for scheduling materials, labor, and
overhead Comprehensive
B. collect costs incurred performing a set of homogeneous [Link] which type of responsibility center is the manager held
activities accountable for its profits?
C. show authority for choosing product markets and sources of A. Cost center C. Investment center
supply B. Profit center D. Profit centers or Investment
D. assign responsibility for setting the chart of accounts centers

[Link] centers in a responsibility accounting system [Link] of the following responsibility centers have managers who
A. will organize the company into the smallest units of activity – the are held accountable for costs?
individual worker A. Cost centers and Investment centers
B. will have a specific manager in charge of every cost center B. Revenue centers and Profit centers
C. should have the same code number for similar units wherever C. Revenue centers and Investment centers
they appear in an organization D. Cost centers and Profit centers
D. should show the contribution margin in its control report
Controllable & noncontrollable costs
Profit center [Link] responsibility accounting the most relevant classification of costs
21.A profit center is is
A. a responsibility center that always reports a profit. A. fixed and variable C. discretionary and committed
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B. incremental and nonincremental D. controllable and manufacturing costs, these additional costs are charged to the
noncontrollable sales manager because the authority to accept or decline the rush
order was given to the sales manager. This type of accounting
Controllable costs system is known as
[Link] costs are costs that A. Functional accounting C. Contribution accounting
A. fluctuate in total in response to small changes in the rate of B. Reciprocal allocation D. Profitability accounting
capacity utilization.
B. will be unaffected by current managerial decisions. Budgeting system
C. management decides to incur in the current period to enable 33.A basic budgeting system includes
the company to achieve objectives other than filling customers’ A. a planning schedule C. involvement of all managers
orders. B. follow-up plan steps D. all of these
D. are likely to respond to the amount of attention devoted to
them by a specified manager. Segmented income statements
[Link] income statements are most meaningful to managers
[Link] conditions and pay were recently set by the personnel when they are prepared
department. The production department has just received a A. on an absorption cost basis C. on a cost behavior basis
request for a rush order from the sales department. The production B. on a cash basis D. in a multi-step format
department protests that additional overtime costs would be
incurred as a result of the order. The sales department argues the Performance evaluation
order is from an important customer. The production department [Link] criteria used for evaluating performance
processes the order. In order to control costs, which department A. should be designed to help achieve goal congruence
should be charged with the overtime costs generated as a result of B. can be used only with profit centers and investment centers
the rush order? C. should be used to compare past performance with current
A. Personnel department performance
B. Production department D. motivate people to work in the company’s best interest
C. Sales department
D. Shared by production department and sales department [Link] most relevance in deciding how or which costs should be
assigned to a responsibility center is the degree of
[Link] one of the following would NOT usually be considered a A. Avoidability C. Causality
controllable cost for the product or division manager? B. Controllability D. Variability
A. factory wages C. maintenance
B. plant salaries D. plant rent expense [Link] reports prepared under the responsibility accounting
approach should be limited to which of the following costs?
Profitability accounting A. Only variable costs of production
[Link] Manufacturing uses an accounting system that charges costs B. Only conversion costs
to the manager who has been delegated the authority to make the C. Only controllable costs
decisions incurring the costs. For example, if the sales manager D. Only costs properly allocable to the cost center under generally
accepts a rush order that requires the incurrence of additional accepted accounting principles
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[Link] best measure of the performance of the manager of a profit [Link] return on investment calculation only considers the following
center is the components:
A. rate of return on investment. S = Sales
B. success in meeting budgeted goals for controllable costs. I = Investment
C. amount of controllable margin generated by the profit center. NI = Net Income
D. amount of contribution margin generated by the profit center. Which of the following formulas best describes the return on
investment calculation?
[Link] used for performance evaluation, periodic internal reports A. (I/S) x (S/NI) = I/NI C. (S/I) x (NI/S) = NI/I
based on a responsibility accounting system should not B. (I/S) x (NI/S) = (Ix NI) x (S x S) D. (S/I) x (S/NI) = (S x S)/(I x NI)
A. be related to the organization chart
B. include allocated fixed overhead [Link] properly motivate divisional management, the divisional ROIs
C. include variances between actual and budgeted controllable should be
costs A. Equal
D. distinguish between controllable and noncontrollable costs B. Greater in the less profitable divisions to motivate those
divisions to achieve higher ROIs
[Link] most desirable measure of departmental performance for C. Lower in more profitable divisions in which motivation is
evaluating the departmental manager is departmental necessary
A. Revenue less controllable departmental expenses D. Different based upon strategic goals of the firm
B. Net income
C. Contribution to indirect expenses [Link] performance using ROI encourages managers to focus
D. Revenue less departmental variable expenses on
A. income and investment
[Link] little or no relevance in evaluating the performance of an activity B. cost efficiency and operating asset efficiency
would be C. both a and b
A. Flexible budgets for mixed costs D. neither a nor b
B. Fixed budgets for mixed costs
C. The difference between planned and actual results 58.A measure frequently used to evaluate the performance of the
D. The planning and control of future activities manager of an investment center is
A. the amount of profit generated.
Performance measures B. the rate of return on funds invested in the center.
Return on Investment C. the percentage increase in profit over the previous year.
[Link] on investment (ROI) is calculated as D. departmental gross profit.
A. divisional operating income/divisional investment
B. divisional investment – divisional income [Link] the formula for ROI, idle plant assets are
C. divisional investment/divisional operating income A. included in the calculation of controllable margin.
D. divisional income – (divisional investment x required rate of B. included in the calculation of operating assets.
return) C. excluded in the calculation of operating assets.
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D. excluded from total assets.

62.A division's investment in conjunction with the residual income may
DuPont Model be
44. C company’s return on investment is affected by a change in A. operating assets
A. B. C. D. B. operating and non-operating assets
Capital turnover Yes Yes No No C. assets minus current liabilities
Profit margin on Yes No No Yes D. any of the above
sales
[Link] order to promote goal congruence a manager of an investment
[Link] on investment for divisions and other company segments is center is best evaluated using
a function of A. standard variable costing income statements
A. assets employed and expected future cash flows. B. return on investment
B. contribution margin and invested capital. C. budgets and standard costs
C. investment turnover and profit margin on sales. D. residual income
D. physical sales volume, prices, variable costs, and fixed costs.
[Link] advantage of residual income is that it encourages managers to
Residual Income A. accept projects which provide returns in excess of the
[Link] residual income for evaluating performance company's required rate of return
A. penalizes managers whose segments have low ROIs B. to increase asset turnover
B. penalizes managers of relatively large segment C. attempt to increase the margin
C. encourages managers to maximize pesos of profit after a D. all of the above
required ROI has been achieved
D. encourage managers to maximize ROI for the company Economic value added
[Link] contrast to residual income (RI), economic value added (EVA)
[Link] income uses:
A. is always the best measure of divisional performance A. the firm's minimum rate of return instead of its cost of capital.
B. is not as good a measure of performance as ROI B. the firm's cost of capital instead of its minimum rate of return
C. overcomes some of the problems associated with ROI C. a required rate of return.
D. cannot be used by divisions that deal with others in the same D. values determined by using conventional accounting policies
company
[Link] of the following would promote goal congruence?
[Link] a firm uses residual income to make decisions, the firm A. return on investment C. single measures of
should favor those projects whose residual income performance
A. is closest to the firm’s minimum capital rate B. income based compensation D. economic value added
B. is lowest
C. is highest Sensitivity Analysis
D. exceeds a specific target amount Return on investment
[Link] that sales and net income remain the same, a company’s
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return on investment will B. assets may be increased D. a and c

A, Increase if invested capital increases
B. Decrease if invested capital decreases [Link] can an investment center improve its return on investment
C. Decrease if the invested capital-employed turnover rate (ROI)?
decreases A. increase margin, increase investments
D. Decrease if the invested capital-employed turnover rate B. decrease margin, decrease turnover
increases C. increase margin, increase turnover
D. decrease margin, increase investments
[Link] other things remaining constant, if a division doubles its
investment turnover, its ROI will Economic value added
A. decrease C. remain constant [Link] value added would decrease if:
B. increase D. double A. operating income increases
B. the division invests in a project wherein the after-tax operating
[Link] factors remaining unchanged, the rate of return on income is more than the cost of capital
investment may be improved by C. operating expenses increase
A. increasing investment in assets. D. cost of capital decreases
B. increasing expenses.
C. reducing sales Estimating Current Market Value of Assets
D. decreasing investment in assets. [Link] of the following is NOT a method for developing or
estimating the current market value of assets?
[Link] of the following will not improve return on investment if other A. Gross Book Value. C. Liquidation Value.
factors remain constant? B. Replacement Cost. D. Economic Value Added.
A. Increasing sales volume while holding fixed expenses constant.
B. Decreasing assets. Comprehensive
C. Increasing selling prices. [Link] of the following is not a true statement?
D. None of the above. A. Many costs are controllable at some level with a company.
B. Responsibility accounting applies to both profit and not-for-
[Link] that sales and net income remain the same, a company’s profit entities.
return on investment (ROI) would C. Fewer costs are controllable as one moves up to each
A. increase if the invested capital-employed turnover rate higher level of managerial responsibility.
decreases. D. The term segment is sometimes used to identify areas of
B. Increase if the invested capital-employed turnover rate responsibility in decentralized operations.
increases.
C. Increase if invested capital increases. PROBLEMS:
D. Decrease if invested capital decreases. DuPont Model
Return on sales
i
[Link] improve asset turnover in conjunction with ROI computations, . The Dela Merced Company’s Household Products Division reported
A. sales may be increased C. assets may be decreased in 2007 sales of P15,000,000, an asset turnover ratio of 3.0, and a
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rate of return on average assets of 18 percent. The percentage of Capital charge 12%
net income to sales is The divisional return on investment is:
A. 6 percent. C. 3 percent A. 15 percent C. 13 percent
B. 12 percent. D. 5 percent. B. 25 percent D. 20 percent

Return on assets Required sales

v
Required unit sales . The manager of the Mac Division of Power Company expects the
ii
. The Valve Division of Industrial Company produces a small valve following results in 2006 (pesos in millions):
that is used by various companies as a component part in their Sales P49.60
products. Industrial Company operates its divisions as Variable costs (60%) 29.76
autonomous units, giving its divisional manager great discretion in Contribution margin P19.84
pricing and other decisions. Each division is expected to generate Fixed costs 12.00
a rate of return of at least 14 percent on its operating assets. The Profit P 7.84
Valve Division has average operating assets of P700,000. The Investment:
valves are sold for P5 each. Variable costs are P3 per valve, and Plant equipment P19.51
fixed costs total P462,000 per year. The Division has a capacity of Working capital 14.88 P34.39
300,000 units. ROI P7.84/P34.39 22.80%
How many valves must the Valve Division sell each year to The division has a target ROI of 30 percent, and the manager has
generate the desired rate of return on its assets? asked you to determine how much sales volume the division would
A. 280,000 C. 355,385 need to reach that. He states that the sales mix is relatively
B. 350,000 D. 265,000 constant so variable costs and equipment should be close to 60
percent of sales, fixed cost and plant and equipment should
Divisional ROI remain constant, and working capital (cash, receivables, and
iii
. Marsh Company that had current operating assets of one million inventories) should vary closely with sales in the percentage
and net income of P200,000 had an opportunity to invest in a reflected above.
project that requires an additional investment of P250,000 and The peso sales that the division needs in order to reach the 30
increased net income by P40,000. After the investment, the percent ROI target is
company's ROI will be A. P19,829,032 C. P57,590,322
A. 16.0% C. 19.2% B. P44,373,871 D. P59,510,000
B. 18.0% D. 20.2%
Residual income
iv vi
. The following data relate to the Motor Division of Eurosun . The current income for a subunit is P36,000. Its current invested
Company: capital is P200,000. The subunit is considering purchasing for
Sales P10,000,000 P20,000 equipment that will increase annual income by an
Variable costs 3,000,000 estimated P2,800. The firm's cost of capital is 12%. If the
Direct fixed costs 5,000,000 equipment is purchased, the residual income of the subunit will
Invested capital 8,000,000 A. increase by P2,800 C. increase by P400
Allocated actual interest costs 800,000 B. increase by P16,000 D. increase by 4%
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could sacrifice and still maintain its expected residual income?

Minimum selling price A. 2,333 C. 3,333
vii
. Matipid Division of Expenditures Company expects the following B. 2,667 D. 3,667
results for 2007:
Unit sales 70,000 Economic Value Added
ix
Unit selling price P 10 . Consider the following:
Unit variable cost P 4 Investment center’s after-tax operating profit P 50,000
Total fixed costs P300,000 Investment center’s total assets 800,000
Total investment P500,000 Investment center’s current liabilities 80,000
The minimum required ROI is 15 percent, and divisions are Weighted-average cost of capital 6.5%
evaluated on residual income. A foreign customer has approached What is the economic value added (EVA)?
Matipid’s manager with an offer to buy 10,000 units at P7 each. If A. P60,000 C. P 6,000
Matipid accepts the order, it would not lose any of the 70,000 units B. P 3,200 D. P50,000
at the regular price. Accepting the order would increase fixed costs
by P10,000 and investment by P40,000. Segmented Income Statement
What is the minimum price that Matipid could accept for the order Controllable segment profit margin
x
and still maintain its expected residual income? . Segment A generated sales revenues of P400,000 and variable
A. P5.00 C. P5.60 operating expenses of P180,000. Its controllable fixed expenses
B. P4.75 D. P9.00 were P40,000. It was assigned 20% of P200,000 of fixed costs
controlled by others. The common fixed costs were P25,000. What
Maximum lost unit sales was Segment A's controllable segment profit margin?
viii
. Magastos Division of Expenditures Company expects the following A. P220,000 C. P140,000
results for 2006: B. P180,000 D. P160,000
Unit sales 70,000
Unit selling price P 10 Sensitivity Analysis
xi
Unit variable cost P 4 . If the investment turnover increased by 30% and ROS decreased by
Total fixed cost 20%, the ROI would
Total fixed costs P 300,000 A. increase by 30% C. increase by 6%
Total investment P 500,000 B. increase by 4% D. none of these
The minimum required ROI is 15 percent, and divisions are
xii
evaluated on residual income. A foreign customer has approached . If the investment turnover decreased by 10% and ROS decreased
Magastos’ manager with an offer to buy 10,000 units at P7 each. by 30%, the ROI would
Magastos Division has capacity of 75,000 units and the foreign A. increase by 30% C. decrease by 10%
customer will not accept fewer than 10,000 units. Accepting the B. decrease by 37% D. none of the above
order would increase fixed costs by P10,000 and investment by
P40,000. Comprehensive
At the price of P7 offered by foreign customer, what is the Use the following information to answer questions 2 thru 6:
maximum number of units in regular sales that Magastos Division Carlyle Company had the following information pertaining to 2005:
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 Responsibility Accounting and Transfer Pricing
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Profit P100,000
Sales P1,000,000
Asset Turnover ratio 2 times
The desired minimum rate of return is 15 percent.
xiii
. What is the ROI?
A. 10 percent C. 20 percent
B. 5 percent D. 15 percent
xiv
. What is the return on sales?
A. 10 percent C. 20 percent
B. 5 percent D. 15 percent
xv
. What is the amount of assets?
A. P250,000 C. P1,000,000
B. P500,000 D. P2,000,000
xvi
. The manager of Carlyle is paid a bonus based on ROI. Would the
manager invest in a project that will pay a return on investment of
18 percent?
A. Yes, because the project's ROI exceeds the desired minimum
rate of return.
B. Yes, because the project's ROI is greater than the company's
current ROI.
C. Yes, because the project's ROI is equal than the company's
current ROI.
D. No, because the project's ROI is less than the company's current
ROI.
xvii
. What is Carlyle's residual income?
A. P 25,000 C. P(200,000)
B. P( 50,000) D. P 150,000

376
i
. Answer: A
Return on Sales: 18% ÷ 3 = 6%

ii
. Answer: A
Operating profit: (0.14 x P700,000) P98,000
Units sold = (Fixed costs + Profit) ÷ UCM (P462,000 + P98,000) ÷ P2 280,000

iii
. Answer: C
New ROI: (200,000 + 40,000) ÷ (1M + 0.25M) 19.2%

iv
. Answer: B
Operating income: 10M – 3M – 5M = P2 Million
ROI = P2M ÷ P8M = 25%

v
. Answer: C
Let S = Sales
0.3(19,510,000 + 0.3S) = (.4S – 12,000,000)
S = 57,590,322.58

vi
. Answer: C
Increase in annual income P2,800
Additional required returns (P20,000 x 0.12) 2,400
Increase in residual value P 400

vii
. Answer: C
Unit variable cost P4.00
Incremental unit fixed cost (P10,000/10) 1.00
Minimum return per P1 of additional asset requirement 40,000 x 0.15 /10,000
0.60
Minimum selling price P5.60

viii
. Answer: A
Contribution provided by 10,000 units
10,000 x (7.00 – 5.60) 14,000
Divided by regular contribution margin per unit ÷ 6
Maximum decrease in regular sales 2,333

ix
. Answer: B
EVA = Investment center's after-tax operating income - (Investment center's total
assets - Investment center's current liabilities) x Weighted-average cost of capital].
Net operating profit P50,000
Cost of investment (P800,000 – P80,000) x 0.075 46,800
Economic Value Added P 3,200

x
. Answer: B
Controllable segment profit margin = Revenue - (Segment's variable operating
costs + Controllable fixed costs).
(P400,000 – P180,000 – P40,000) P180,000

xi
. Answer: B
(1.3 x 0.8) – 100% = 4.0%

xii
. Answer: B
Decrease in ROI: (0.90 x 0.70) – 1.00 = 37.0%

xiii
. Answer: C
ROI = Operating Profit ÷ Average investment
Average Operating assets: (P1,000,000 ÷ 2) = P500,000
ROI: (P100,000 ÷ P500,000) = 20%

xiv
. Answer: A
Return on sales = Profit ÷ Net sales
P100,000 ÷ P1,000,000 = 10%

xv
. Answer: B
Total assets = Sales ÷ Asset turnover
P1,000,000 ÷ 2 = P500,000
xvi
. Answer: D
No, because the manager's bonus would go down because the company's ROI is 20
percent only.

xvii
. Answer: A
Operating profit P100,000
Less Required return on average assets: (P500,000 x 15%) 75,000
Residual income P 25,000

B. TRANSFER PRICING

THEORIES:
Nature
5. Transfer prices are charges for
A. transportation of goods outside units of an organization.
B. goods sold by subunits to outside customers.
C. goods exchanged among subunits.
D. goods stored within a subunit.

23.A transfer price is a price charged

A. to outside customers
B. when one division sells its goods or services to another division
C. by the selling division to the buying division when outside market does not exist
D. a and b

[Link] prices are

A. necessary to calculate costs in a cost, profit, or investment center
B. preferred by buying divisions are the lowest possible
C. do not make any difference for the company's bottom-line no matter what number
is used
D. all of the above

[Link] of the following is a key factor to consider in deciding whether to make internal
transfers, and, if so, in setting the transfer price?
A. Is there an outside supplier?
B. Is the seller's variable cost less than the market price/
C. Is the selling unit operating at full capacity?
D. All of the above are key factors.

[Link] the standpoint of the company, the important question in transfer pricing is
A. what is fair to the divisions
B. how to determine the profit of the divisions
C. whether or not the transfer should take place
D. when the transfer should be made

Objectives
1. The objective of a transfer pricing system should be to
A. maximize the transfer price
B. minimize the transfer price
C. maintain goal congruence between the divisions and the entire firm
D. none of the above

2. The objective(s) of transfer pricing are

A. to motivate managers
B. to provide an incentive for managers to make decisions consistent with the firm's
goals (i.e., goal congruence)
C. to provide a basis for fairly rewarding the managers
D. all of the above

4. A transfer pricing system should satisfy which of the following objectives?

A. accurate performance evaluation C. goal congruence
B. preservation of divisional autonomy D. all of the above

[Link] market price method satisfy a key objective of transfer pricing, namely:
A. objectivity C. consistency
B. usability D. reliability
Irrelevant costs
[Link] item is usually not relevant to a decision by a divisional manager to reduce a
transfer price to meet a price offered to another division by an outside supplier?
A. opportunity cost
B. variable manufacturing costs
C. fixed divisional overhead
D. the price offered by the outside supplier

Minimum & Maximum Transfer Price

General rule
9. The general rule in establishing transfer prices consistent with economic decision
making is the
A. differential cost plus opportunity cost if goods are transferred internally.
B. actual cost plus opportunity cost if goods are transferred internally.
C. standard cost plus opportunity cost if goods are transferred internally.
D. all of the above.

Seller’s standpoint (minimum price)

[Link] minimum transfer price should be:
A. opportunity cost for selling division
B. opportunity cost for buying division
C. opportunity cost for the company as a whole
D. only variable cost for the selling division

14.A selling division produces components for a buying division that is considering
accepting a special order for the products it produces. The selling division has excess
capacity. The minimum price the selling division would be willing to accept is the
A. selling division’s variable costs
B. buying division’s outside purchase price
C. price that would allow the buying division to cover its incremental cost of the
special order
D. price that would allow the selling division to maintain its current ROI

[Link] minimum transfer price from the seller's standpoint is

A. market price when excess capacity exists
B. market price when excess capacity does not exist
C. incremental costs when excess capacity exists
D. b and c

Buyer’s standpoint (maximum price)

7. Generally, the outside market price would be
A. a floor for internal transfer price.
B. a ceiling for internal transfer price.
C. both a and b
D. none of the above.

Methods of transfer pricing

3. The basic methods used in transfer pricing are
A. variable or full costs C. market price or negotiated price
B. dual prices D. all of the above

8. An example of a transfer price policy is

A. market price.
B. actual cost plus markup.
C. standard cost plus markup.
D. all of the above.

[Link] prices are set by:

A. cost or cost plus C. negotiation
B. market prices D. all of the above

[Link] of the following are transfer pricing models?

A. Variable cost method C. Market cost method
B. Average price method D. All of the above

Market price
[Link] a firm operates at capacity, the transfer price should be the:
A. external market price. C. actual cost.
B. differential cost. D. standard cost.
[Link] avoid waste and maximize efficiency when transferring products among divisions
in a competitive economy, a large diversified corporation should base transfer prices
on:
A. full cost C. replacement cost
B. variable cost D. market price

[Link] an intermediate market exists, the optimal transfer price is the:

A. outlay cost for producing the goods.
B. opportunity cost of not selling to the outside market.
C. market price.
D. variable costs associated with producing the product.

[Link] there is no excess capacity, the transfer price is often

A. market price
B. opportunity cost plus incremental cost
C. variable cost or variable cost plus profit
D. a or b

[Link] pricing approach in transfer pricing

A. helps to preserve unit autonomy
B. provides incentive for the selling unit to be competitive with outside suppliers
C. may be the most practical approach when there is significant conflict
D. both a and b

[Link] best transfer price is usually

A. actual cost plus a percentage markup
B. a reliable market price
C. budgeted full cost plus a percentage markup
D. budgeted variable cost plus a percentage markup

[Link]-based transfer prices are best for the

A. company when the selling division is operating below capacity.
B. company when the selling division is operating at capacity.
C. buying division if it is operating at capacity.
D. buying division.

[Link] transfer price is ideal for the company when the selling division is at capacity?
A. Market price
B. Incremental cost
C. Budgeted full cost
D. Actual variable cost plus a percentage profit

Actual costs
6. Disadvantages of transfer prices based on actual cost include:
A. reducing the incentive of managers of supplying divisions to control their costs.
B. passing on efficiencies or inefficiencies of supplying divisions to receiving divisions.
C. both a and b.
D. none of the above.

[Link] of the following types of transfer prices do not encourage the selling division to
be efficient?
A. transfer prices based upon market prices
B. transfer prices based upon actual costs
C. transfer prices based upon standard costs
D. transfer prices based upon standard costs plus a markup for profit

[Link] worst transfer-pricing method is to base the prices on

A. market prices C. budgeted variable costs
B. budgeted total costs D. actual total costs

Variable costing
[Link] costing method of transfer pricing is
A. easy to implement
B. intuitive and easily understood
C. more logical when there is excess capacity
D. all of the above

22.A company may consider using variable costs in transfer pricing when there is
 A. excess capacity because variable costs would stay the same
B. no excess capacity because variable costs would not stay the same
C. excess capacity because fixed costs would stay the same
D. no excess capacity because fixed costs would stay the same

Full cost
[Link] full cost is used in transfer pricing, it is preferable to use
A. standard full cost because the buyer does not wish to be stuck with unknowns
B. standard full cost because the seller does not wish to pass along the variations in
cost
C. actual full cost because the buyer is well-advised to deal with the real rather than
anticipated costs
D. actual full costs because the seller is well-advised to deal with the real rather than
anticipated costs

Negotiated
[Link] transfer prices are appropriate when:
A. there are cost savings to the selling division.
B. there is no external market price.
C. the internal market price reflects a bargain price.
D. all of the above.

17.A negotiated transfer pricing system is set up where

A. the two sides cannot agree on a price and the difference between the two sides is
absorbed by the home office
B. a ready market price is not available and the two sides must come up with an
agreeable price
C. the buyer buys at variable cost and the seller only sells at full cost
D. the two sides agree to use a cost basis for transfer pricing

Multinational transfer pricing

[Link] minimize taxes, some multinational companies set low transfer prices when goods
are shipped from
A. low tax countries to other low tax countries
B. low tax countries to high tax countries
C. high tax countries to low tax countries
D. c or b

PROBLEMS:
Residual income
. Marsh Company that had current operating assets of one million and net income of
P200,000 had an opportunity to invest in a project that requires an additional
investment of P250,000 and increased net income by P40,000. The company's
required rate of return is 12%. After the investment, the company's residual income
will amount to
A. 80,000 C. 90,000
B. 85,000 D. 95,000

With excess capacity

Bargaining range
. An appropriate transfer price between two divisions of the Reno Corporation can be
determined from the following data:
Fabrication Division
Market price of subassembly P50
Variable cost of subassembly P20
Excess capacity (in units) 1,000
Assembling Division
Number of units needed 900
What is the natural bargaining range for the two divisions?
A. Between P20 and P50 C. Between P50 and P70
B. Any amount less than P50 D. P50 is the only acceptable price

Minimum transfer price

. Family Enterprises has two divisions: Davy and Johnny. Davy Division has a capacity to
produce 2,000 units and is expecting to sell 1,500 units. Johnny Division wants to
purchase 100 units of a product Davy produces. Davy sells the product at a selling
price of P100 per unit, the variable cost per unit is P25 and the fixed costs total
P30,000. The minimum transfer price that Davy will accept is?
A. P100 C. P43.75
 B. P45 D. P25

. Assume that Division X has a product that can be sold either to outside customers on
an intermediate market or to Division Y of the same company for use in its
production process. The managers of the division are evaluated based on their
divisional profits.
Division X:
Capacity in units 200,000
Number of units being sold on the intermediate market 160,000
Selling price per unit on the intermediate market P75
Variables costs per unit 60
Fixed costs per unit (based on capacity) 8

Division Y:
Number of units needed for production 40,000
Purchase price per unit now being paid to an outside supplier P74
The minimum transfer price to be charged by the Division X should be:
A. P60 C. P68
B. P75 D. P74

Effect on profit of make decision

. Bearing Division of Phantom Corp. sells 80,000 units of Part X to the outside market.
Part X sells for P10.00 and has a variable cost of P5.50 and a fixed cost per unit of
P2.50. Bearing has a capacity to produce 100,000 units per period. Motor Division
currently purchases 10,000 units of Part X from Bearing for P10.00. Motor has been
approached by an outside supplier willing to supply the parts for P9.00. What is the
effect on XYZ’s overall profit if Bearing refuses the outside price and Motor decides to
buy outside?
A. no change
B. P20,000 decrease in Phantom profits
C. P35,000 decrease in Phantom profits
D. P10,000 increase in Phantom profits

. Bearing Division of XYZ Corp. sells 80,000 units of Part X to the outside market. Part X
sells for P10.00 and has a variable cost of P5.50 and a fixed cost per unit of P2.50.
Bearing has a capacity to produce 100,000 units per period. Motor Division currently
purchases 10,000 units of Part X from Bearing for P10.00. Motor has been approached
by an outside supplier willing to supply the parts for P9.00. What is the effect on
XYZ’s overall profit if Bearing refuses the outside price and Motor decides to buy
inside?
A. no change C. P35,000 decrease in XYZ profits
B. P20,000 decrease in XYZ profits D. P10,000 increase in XYZ profits

At capacity
Minimum transfer price
. Company Y is highly decentralized. Division X, which is operating at capacity,
produces a component that it currently sells in a perfectly competitive market for
P13 per unit. At the current level of production, the fixed cost of producing this
component is P4 per unit and the variable cost is P7 per unit. Division Z would like
to purchase this component from Division X. What would be the price that Division X
should charge Division Z?
A. P 7 C. P 11
B. P 13 D. P 9

. The Black Division of Pluma Company produces a high quality marker. 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
The Black Division is producing and selling at capacity.
What is the minimum selling price that the division would consider as a “transfer
price” to the Red Division on which no variable period costs would be incurred?
A. P120 C. P 88
B. P 91 D. P117 (?)

. Harem Corporation consists of two divisions, Mining and Builders. The Mining makes
black steel, a product that can be used in the product that the Builders division
 makes. Both divisions are considered profit centers. The following data are available
concerning black steel and the two divisions:
MiningBuildersAverage units produced150,000 Average units sold 150,000Variable
mfg cost per unitP2 Variable finishing cost per unit P5Fixed divisional
costsP75,000P125,000The Mining Division can sell all of its output outside the
company for P4 per unit. The Builders Division can buy the black steel from other
firms for P4. The Builders Division sells its product for P12.
What is the optimal transfer price in this case?
A. P2 per unit C. P7 per unit
B. P4 per unit D. P9 per unit

. Assume that Steel Division has a product that can be sold either to outside
customers on an intermediate market or to Fabrication Division of the same
company for use in its production process. The managers of the division are
evaluated based on their divisional profits.
Steel Division:
Capacity in units 200,000
Number of units being sold on the intermediate market 200,000
Selling price per unit on the intermediate market P90
Variables costs per unit (including P3 of avoidable selling expense) 70
Fixed costs per unit (based on capacity) 13

Fabrication Division:
Number of units needed for production 40,000
Purchase price per unit now being paid to an outside supplier P86
The appropriate transfer price should be:
A. P90 C. P70
B. P87 D. P86

Partial excess capacity

Decision
. Chips Division manufacturers electronic circuit boards. The boards can be sold either
to Compo Division of the same company or to outside customers. Last year, the
following activity occurred in division A:

Selling price per circuit board P125

Production cost per circuit board 90
Numbers of circuit boards:
Produced during the year 20,000
Sold to outside customers 16,000
Sold to Compo Division 4,000

Sales to Compo Division were at the same price as sales to outside customers. The
circuit boards purchased by Compo Division were used in an electronic instrument
manufactured by that division (one board per instrument). Compo Division incurred
P100 in additional cost per instrument and then sold the instrument for P300 each.

Assume that Chips Division’s manufacturing capacity is 20,000 circuit boards. Next
year Compo Division wants to purchase 5,000 circuits board from Chips Division
rather than 4,000. (Circuit boards of this type are not available from outside
sources.)

Should Chips Division sell 1,000 additional circuit boards to Compo Division or
continue to sell them outside customers?
A. No, because the overall profit will decrease by P35,000.
B. Yes, because the overall profit will decrease by P35,000.
C. No, because there is no change in the overall profit.
D. Yes, because the overall profit will increase by P75,000.

Maximum transfer price

. Chips Division manufacturers electronic circuit boards. The boards can be sold either
to Compo Division of the same company or to outside customers. Last year, the
following activity occurred in division A:
Selling price per circuit board P125
Production cost per circuit board 90
Numbers of circuit boards:
Produced during the year 20,000
Sold to outside customers 16,000
Sold to Compo Division 4,000
 Sales to Compo Division were at the same price as sales to outside customers. The
circuit boards purchased by Compo Division were used in an electronic instrument
manufactured by that division (one board per instrument). Compo Division incurred
P100 in additional cost per instrument and then sold the instrument for P300 each.

Assume that Chips Division’s manufacturing capacity is 20,000 circuit boards. Next
year Compo Division wants to purchase 5,000 circuits board from Chips Division
rather than 4,000. (Circuit boards of this type are not available from outside
sources.)

Chips Division proposed that a transfer for additional 1,000 units be produced by
requiring its workers to work overtime. Chips Division indicated that the transfer
price may be unreasonably high because of the overtime premium.

What is the maximum transfer that Compo Division will accept for the additional
1,000 units?
A. P 90 C. P200
B. P125 D. P300

Use the following data to answer questions 11 through 13.

N & R Company transfers a product from division N to division R. Variable cost of this
product is anticipated to be P40 a unit and total fixed costs amount to P8,000. A total of
100 units are anticipated to be produced. Actual cost, however, amounts to P50 for
variable costs. Fixed costs were same as budget. However, actual output was twice as
many.

. Actual cost per unit amounts to

A. P90 C. P115
B. P92 D. P120

. The transfer price based on actual variable costs plus 130% markup amounts to
A. P90 C. P115
B. P92 D. P120

. The transfer price based on budgeted full cost plus 30% markup amounts to
A. P117 C. P150
B. P140 D. P156

B. TRANSFER PRICING

THEORIES:
Nature
5. Transfer prices are charges for
A. transportation of goods outside units of an organization.
B. goods sold by subunits to outside customers.
C. goods exchanged among subunits.
D. goods stored within a subunit.

23.A transfer price is a price charged

A. to outside customers
B. when one division sells its goods or services to another division
C. by the selling division to the buying division when outside market does not exist
D. a and b

[Link] prices are

A. necessary to calculate costs in a cost, profit, or investment center
B. preferred by buying divisions are the lowest possible
C. do not make any difference for the company's bottom-line no matter what number
is used
D. all of the above

[Link] of the following is a key factor to consider in deciding whether to make internal
transfers, and, if so, in setting the transfer price?
A. Is there an outside supplier?
B. Is the seller's variable cost less than the market price/
C. Is the selling unit operating at full capacity?
D. All of the above are key factors.
[Link] the standpoint of the company, the important question in transfer pricing is
A. what is fair to the divisions
B. how to determine the profit of the divisions
C. whether or not the transfer should take place
D. when the transfer should be made

Objectives
1. The objective of a transfer pricing system should be to
A. maximize the transfer price
B. minimize the transfer price
C. maintain goal congruence between the divisions and the entire firm
D. none of the above

2. The objective(s) of transfer pricing are

A. to motivate managers
B. to provide an incentive for managers to make decisions consistent with the firm's
goals (i.e., goal congruence)
C. to provide a basis for fairly rewarding the managers
D. all of the above

4. A transfer pricing system should satisfy which of the following objectives?

A. accurate performance evaluation C. goal congruence
B. preservation of divisional autonomy D. all of the above

[Link] market price method satisfy a key objective of transfer pricing, namely:
A. objectivity C. consistency
B. usability D. reliability

Irrelevant costs
[Link] item is usually not relevant to a decision by a divisional manager to reduce a
transfer price to meet a price offered to another division by an outside supplier?
A. opportunity cost
B. variable manufacturing costs
C. fixed divisional overhead
D. the price offered by the outside supplier

Minimum & Maximum Transfer Price

General rule
9. The general rule in establishing transfer prices consistent with economic decision
making is the
A. differential cost plus opportunity cost if goods are transferred internally.
B. actual cost plus opportunity cost if goods are transferred internally.
C. standard cost plus opportunity cost if goods are transferred internally.
D. all of the above.

Seller’s standpoint (minimum price)

[Link] minimum transfer price should be:
A. opportunity cost for selling division
B. opportunity cost for buying division
C. opportunity cost for the company as a whole
D. only variable cost for the selling division

14.A selling division produces components for a buying division that is considering
accepting a special order for the products it produces. The selling division has excess
capacity. The minimum price the selling division would be willing to accept is the
A. selling division’s variable costs
B. buying division’s outside purchase price
C. price that would allow the buying division to cover its incremental cost of the
special order
D. price that would allow the selling division to maintain its current ROI

[Link] minimum transfer price from the seller's standpoint is

A. market price when excess capacity exists
B. market price when excess capacity does not exist
C. incremental costs when excess capacity exists
D. b and c

Buyer’s standpoint (maximum price)

7. Generally, the outside market price would be
A. a floor for internal transfer price.
B. a ceiling for internal transfer price.
C. both a and b
D. none of the above.

Methods of transfer pricing

3. The basic methods used in transfer pricing are
A. variable or full costs C. market price or negotiated price
B. dual prices D. all of the above

8. An example of a transfer price policy is

A. market price.
B. actual cost plus markup.
C. standard cost plus markup.
D. all of the above.

[Link] prices are set by:

A. cost or cost plus C. negotiation
B. market prices D. all of the above

[Link] of the following are transfer pricing models?

A. Variable cost method C. Market cost method
B. Average price method D. All of the above

Market price
[Link] a firm operates at capacity, the transfer price should be the:
A. external market price. C. actual cost.
B. differential cost. D. standard cost.

[Link] avoid waste and maximize efficiency when transferring products among divisions
in a competitive economy, a large diversified corporation should base transfer prices
on:
A. full cost C. replacement cost
B. variable cost D. market price

[Link] an intermediate market exists, the optimal transfer price is the:

A. outlay cost for producing the goods.
B. opportunity cost of not selling to the outside market.
C. market price.
D. variable costs associated with producing the product.

[Link] there is no excess capacity, the transfer price is often

A. market price
B. opportunity cost plus incremental cost
C. variable cost or variable cost plus profit
D. a or b

[Link] pricing approach in transfer pricing

A. helps to preserve unit autonomy
B. provides incentive for the selling unit to be competitive with outside suppliers
C. may be the most practical approach when there is significant conflict
D. both a and b

[Link] best transfer price is usually

A. actual cost plus a percentage markup
B. a reliable market price
C. budgeted full cost plus a percentage markup
D. budgeted variable cost plus a percentage markup

[Link]-based transfer prices are best for the

A. company when the selling division is operating below capacity.
B. company when the selling division is operating at capacity.
C. buying division if it is operating at capacity.
D. buying division.

[Link] transfer price is ideal for the company when the selling division is at capacity?
A. Market price
B. Incremental cost
 C. Budgeted full cost
D. Actual variable cost plus a percentage profit

Actual costs
6. Disadvantages of transfer prices based on actual cost include:
A. reducing the incentive of managers of supplying divisions to control their costs.
B. passing on efficiencies or inefficiencies of supplying divisions to receiving divisions.
C. both a and b.
D. none of the above.

[Link] of the following types of transfer prices do not encourage the selling division to
be efficient?
A. transfer prices based upon market prices
B. transfer prices based upon actual costs
C. transfer prices based upon standard costs
D. transfer prices based upon standard costs plus a markup for profit

[Link] worst transfer-pricing method is to base the prices on

A. market prices C. budgeted variable costs
B. budgeted total costs D. actual total costs

Variable costing
[Link] costing method of transfer pricing is
A. easy to implement
B. intuitive and easily understood
C. more logical when there is excess capacity
D. all of the above

22.A company may consider using variable costs in transfer pricing when there is
A. excess capacity because variable costs would stay the same
B. no excess capacity because variable costs would not stay the same
C. excess capacity because fixed costs would stay the same
D. no excess capacity because fixed costs would stay the same

Full cost
[Link] full cost is used in transfer pricing, it is preferable to use
A. standard full cost because the buyer does not wish to be stuck with unknowns
B. standard full cost because the seller does not wish to pass along the variations in
cost
C. actual full cost because the buyer is well-advised to deal with the real rather than
anticipated costs
D. actual full costs because the seller is well-advised to deal with the real rather than
anticipated costs

Negotiated
[Link] transfer prices are appropriate when:
A. there are cost savings to the selling division.
B. there is no external market price.
C. the internal market price reflects a bargain price.
D. all of the above.

17.A negotiated transfer pricing system is set up where

A. the two sides cannot agree on a price and the difference between the two sides is
absorbed by the home office
B. a ready market price is not available and the two sides must come up with an
agreeable price
C. the buyer buys at variable cost and the seller only sells at full cost
D. the two sides agree to use a cost basis for transfer pricing

Multinational transfer pricing

[Link] minimize taxes, some multinational companies set low transfer prices when goods
are shipped from
A. low tax countries to other low tax countries
B. low tax countries to high tax countries
C. high tax countries to low tax countries
D. c or b

PROBLEMS:
Residual income
. Marsh Company that had current operating assets of one million and net income of
P200,000 had an opportunity to invest in a project that requires an additional
investment of P250,000 and increased net income by P40,000. The company's
required rate of return is 12%. After the investment, the company's residual income
will amount to
A. 80,000 C. 90,000
B. 85,000 D. 95,000

With excess capacity

Bargaining range
. An appropriate transfer price between two divisions of the Reno Corporation can be
determined from the following data:
Fabrication Division
Market price of subassembly P50
Variable cost of subassembly P20
Excess capacity (in units) 1,000
Assembling Division
Number of units needed 900
What is the natural bargaining range for the two divisions?
A. Between P20 and P50 C. Between P50 and P70
B. Any amount less than P50 D. P50 is the only acceptable price

Minimum transfer price

. Family Enterprises has two divisions: Davy and Johnny. Davy Division has a capacity to
produce 2,000 units and is expecting to sell 1,500 units. Johnny Division wants to
purchase 100 units of a product Davy produces. Davy sells the product at a selling
price of P100 per unit, the variable cost per unit is P25 and the fixed costs total
P30,000. The minimum transfer price that Davy will accept is?
A. P100 C. P43.75
B. P45 D. P25

. Assume that Division X has a product that can be sold either to outside customers on
an intermediate market or to Division Y of the same company for use in its
production process. The managers of the division are evaluated based on their
divisional profits.
Division X:
Capacity in units 200,000
Number of units being sold on the intermediate market 160,000
Selling price per unit on the intermediate market P75
Variables costs per unit 60
Fixed costs per unit (based on capacity) 8

Division Y:
Number of units needed for production 40,000
Purchase price per unit now being paid to an outside supplier P74
The minimum transfer price to be charged by the Division X should be:
A. P60 C. P68
B. P75 D. P74

Effect on profit of make decision

. Bearing Division of Phantom Corp. sells 80,000 units of Part X to the outside market.
Part X sells for P10.00 and has a variable cost of P5.50 and a fixed cost per unit of
P2.50. Bearing has a capacity to produce 100,000 units per period. Motor Division
currently purchases 10,000 units of Part X from Bearing for P10.00. Motor has been
approached by an outside supplier willing to supply the parts for P9.00. What is the
effect on XYZ’s overall profit if Bearing refuses the outside price and Motor decides to
buy outside?
A. no change
B. P20,000 decrease in Phantom profits
C. P35,000 decrease in Phantom profits
D. P10,000 increase in Phantom profits

. Bearing Division of XYZ Corp. sells 80,000 units of Part X to the outside market. Part X
sells for P10.00 and has a variable cost of P5.50 and a fixed cost per unit of P2.50.
Bearing has a capacity to produce 100,000 units per period. Motor Division currently
purchases 10,000 units of Part X from Bearing for P10.00. Motor has been approached
by an outside supplier willing to supply the parts for P9.00. What is the effect on
XYZ’s overall profit if Bearing refuses the outside price and Motor decides to buy
inside?
 A. no change C. P35,000 decrease in XYZ profits
B. P20,000 decrease in XYZ profits D. P10,000 increase in XYZ profits

At capacity
Minimum transfer price
. Company Y is highly decentralized. Division X, which is operating at capacity,
produces a component that it currently sells in a perfectly competitive market for
P13 per unit. At the current level of production, the fixed cost of producing this
component is P4 per unit and the variable cost is P7 per unit. Division Z would like
to purchase this component from Division X. What would be the price that Division X
should charge Division Z?
A. P 7 C. P 11
B. P 13 D. P 9

. The Black Division of Pluma Company produces a high quality marker. 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
The Black Division is producing and selling at capacity.
What is the minimum selling price that the division would consider as a “transfer
price” to the Red Division on which no variable period costs would be incurred?
A. P120 C. P 88
B. P 91 D. P117 (?)

. Harem Corporation consists of two divisions, Mining and Builders. The Mining makes
black steel, a product that can be used in the product that the Builders division
makes. Both divisions are considered profit centers. The following data are available
concerning black steel and the two divisions:
MiningBuildersAverage units produced150,000 Average units sold 150,000Variable
mfg cost per unitP2 Variable finishing cost per unit P5Fixed divisional
costsP75,000P125,000The Mining Division can sell all of its output outside the
company for P4 per unit. The Builders Division can buy the black steel from other
firms for P4. The Builders Division sells its product for P12.
What is the optimal transfer price in this case?
A. P2 per unit C. P7 per unit
B. P4 per unit D. P9 per unit

. Assume that Steel Division has a product that can be sold either to outside
customers on an intermediate market or to Fabrication Division of the same
company for use in its production process. The managers of the division are
evaluated based on their divisional profits.
Steel Division:
Capacity in units 200,000
Number of units being sold on the intermediate market 200,000
Selling price per unit on the intermediate market P90
Variables costs per unit (including P3 of avoidable selling expense) 70
Fixed costs per unit (based on capacity) 13

Fabrication Division:
Number of units needed for production 40,000
Purchase price per unit now being paid to an outside supplier P86
The appropriate transfer price should be:
A. P90 C. P70
B. P87 D. P86

Partial excess capacity

Decision
. Chips Division manufacturers electronic circuit boards. The boards can be sold either
to Compo Division of the same company or to outside customers. Last year, the
following activity occurred in division A:

Selling price per circuit board P125

Production cost per circuit board 90
Numbers of circuit boards:
Produced during the year 20,000
Sold to outside customers 16,000
 Sold to Compo Division 4,000

Sales to Compo Division were at the same price as sales to outside customers. The
circuit boards purchased by Compo Division were used in an electronic instrument
manufactured by that division (one board per instrument). Compo Division incurred
P100 in additional cost per instrument and then sold the instrument for P300 each.

Assume that Chips Division’s manufacturing capacity is 20,000 circuit boards. Next
year Compo Division wants to purchase 5,000 circuits board from Chips Division
rather than 4,000. (Circuit boards of this type are not available from outside
sources.)

Should Chips Division sell 1,000 additional circuit boards to Compo Division or
continue to sell them outside customers?
A. No, because the overall profit will decrease by P35,000.
B. Yes, because the overall profit will decrease by P35,000.
C. No, because there is no change in the overall profit.
D. Yes, because the overall profit will increase by P75,000.

Maximum transfer price

. Chips Division manufacturers electronic circuit boards. The boards can be sold either
to Compo Division of the same company or to outside customers. Last year, the
following activity occurred in division A:
Selling price per circuit board P125
Production cost per circuit board 90
Numbers of circuit boards:
Produced during the year 20,000
Sold to outside customers 16,000
Sold to Compo Division 4,000

Sales to Compo Division were at the same price as sales to outside customers. The
circuit boards purchased by Compo Division were used in an electronic instrument
manufactured by that division (one board per instrument). Compo Division incurred
P100 in additional cost per instrument and then sold the instrument for P300 each.

Assume that Chips Division’s manufacturing capacity is 20,000 circuit boards. Next
year Compo Division wants to purchase 5,000 circuits board from Chips Division
rather than 4,000. (Circuit boards of this type are not available from outside
sources.)

Chips Division proposed that a transfer for additional 1,000 units be produced by
requiring its workers to work overtime. Chips Division indicated that the transfer
price may be unreasonably high because of the overtime premium.

What is the maximum transfer that Compo Division will accept for the additional
1,000 units?
A. P 90 C. P200
B. P125 D. P300

Use the following data to answer questions 11 through 13.

N & R Company transfers a product from division N to division R. Variable cost of this
product is anticipated to be P40 a unit and total fixed costs amount to P8,000. A total of
100 units are anticipated to be produced. Actual cost, however, amounts to P50 for
variable costs. Fixed costs were same as budget. However, actual output was twice as
many.

. Actual cost per unit amounts to

A. P90 C. P115
B. P92 D. P120

. The transfer price based on actual variable costs plus 130% markup amounts to
A. P90 C. P115
B. P92 D. P120

. The transfer price based on budgeted full cost plus 30% markup amounts to
A. P117 C. P150
B. P140 D. P156