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N12401 MAD II

Self-Assessment
Transfer Pricing

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

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

2.

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


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

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

N12401 MAD II

Self-Assessment
Transfer Pricing

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


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

The negotiated transfer price approach should be used when


a.
the selling division has available capacity and is willing to accept less than the market
price.
b.
an outside market for the goods does not exist.
c.
no market price is available.
d.
any of these situations exist.

12. Assuming the selling division has available capacity, a negotiated transfer price should be within
the range of
a.
fixed cost per unit and the external purchase price.
b.
total cost per unit and the external purchase price.
c.
variable cost per unit and the external purchase price.
d.
none of these is correct.
13. The transfer price approach that will result in the largest contribution margin to the buying
division is the
a.
cost-based approach.
b.
market-based approach.
c.
negotiated price approach.
d.
time and material pricing approach.
14.

The
a.
b.
c.
d.

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


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

15. Mathis Corporation manufactures automotive compact disc changers. It is a division of American
Motors, which manufactures automobiles. Mathis sells the CD changers to American, as well as to
retail stores. The following information is available for Mathis's CD changer: variable cost per unit
$105; fixed costs per unit $75; and a selling price of $260 to outside customers. American
currently purchases CD changers from an outside supplier for $240 each. Top management of
American would like Mathis to provide 50,000 changers per year at a transfer price of $105 each.
Compute the minimum transfer price that Mathis should accept under each of the following
assumptions:
(a) Mathis is operating at full capacity.
(b) Mathis has sufficient excess capacity to provide the 50,000 changers to American.
16. Modine Manufacturing, a division of Datson Corporation, produces car radiators. Modine sells
radiators to auto parts stores, as well as to Datson. The following information is available for
Modine's radiators:
Fixed costs per unit
$ 90
Variable cost per unit
60
Selling price per unit
215

N12401 MAD II

Self-Assessment
Transfer Pricing

Datson can purchase comparable radiators from an outside supplier for $200. In order to ensure
a reliable supply, Datson's management ordered Modine to provide 100,000 radiators per year at
a transfer price of $200 per unit. Modine is currently operating at full capacity. It could avoid $4
per unit of variable selling costs by selling internally.
(a) Compute the minimum transfer price that Modine should be required to accept.
(b) Compute the increase (decrease) in contribution margin for Datson for this transfer.
17. Pubworld is a textbook publishing company that has contracts with several different authors. It
also operates a printing operation called Printpro. Both companies operate as separate profit
centers. Printpro prints textbooks written by Pubworld authors, as well as books written by nonPubworld authors. The printing operation bills out at $0.02 per page and a typical textbook
requires 600 pages of print. A developmental editor from Pubworld approached the printing
operation manager offering to pay $0.012 per page for 5,000 copies of a 600-page textbook.
Outside printers are currently charging $0.015 per page. Printpro's variable cost per page is
$0.01.
(a) Calculate the appropriate transfer price and indicate whether the printing should be done
internally by Printpro under each of the following situations:
i. Printpro has available capacity.
ii. Printpro has no available capacity and would have to cancel an outside customer's job to
accept the editor's offer.
(b) Calculate the change in contribution margin for each company, if top management forces
Printpro to accept the $0.012 transfer price when it has no available capacity.
18. CoolFan Plc organises its manufacturing activities into two divisions, Division C and Division F.
Division C produces one type of product, CF-A, which it transfers to Division F internally and also
sells to external market. Division Cs budgets for the next quarter show that variable costs are
expected to be $22 per unit and the fixed costs will amount to $100,000 in total.
During the same quarter, Division C is to sell 10,000 units of the product at $40 per unit to
Division F and 6,000 units at $45 per unit to the external market. Based on the existing market
condition, sales to the external market is not likely to exceed the budget.
Division F has recently been approached by another company which has offered to supply 2,500
units of CF-A for $35 each.
If Division F decides to accept the offer, what is the impact of the decision on the profits of
Division C and CoolFan Plc?
19. CareFree Plc organises its manufacturing activities into two divisions, Division C and Division F.
Division C is developing a new product, CF-II which it will sell internally to Division F as well as to
its own external market. The external market price is $24.00 per unit, which yields a contribution
of 40% of sales.
For external sales, variable costs include $1.50 per unit for distribution costs. The distribution
costs are avoidable for internal sales. Division C has sufficient capacity to meet all available
demands both internal and external sales.
If Division C is trying to maximise the overall profit of CareFree Plc, at what price should it set
the internal transfer price?

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