MANAGEMENT ACCOUNTING II

QUIZ# 2- TRANSFER PRICING

NAME: _______________________________________________________ Date:_______________________

Score: _________________________

INSTRUCTIONS: ENCIRCLE THE LETTER OF YOUR CHOICE. NO SOLUTION, NO CREDIT.

STRICTLY NO ERASURE/ALTERATION IS ALLOWED. THEORETICAL QUESTIONS WILL BE GIVEN
ONE (1) POINT EACH WHILE PRACTICAL QUESTIONS ARE TWO (2) POINTS EACH.

1 A company that uses a separate transfer price for each division in a single transaction is
employing:

a. dual pricing
b. market-based pricing
c. negotiated pricing
d. full cost pricing
2 If the selling subunit is operating at full capacity and can sell everything produced either
internally or externally, it will only be willing to use a transfer price set by:
a. cost plus a mark-up
b. negotiation
c. the market
d. variable costing
3 Which transfer pricing method will preserve the subunit autonomy?
a. Cost-based pricing
b. Negotiated pricing
c. Full-cost pricing
d. Variable-cost pricing
4 Transfer prices
a. reduce employee turnover.
b. are necessary for investment centers.
c. should encourage the kinds of behavior that upper-level management wants.
d. are not used for departments with high amounts of fixed costs.

5 A transfer price is
a. an accounting device to turn profit centers into investment centers.
b. the price charged by one segment of the company for goods or services provided to
another segment.
c. only useful in a segment that deals with outsiders as well as with other segments of
the same company.
d. the amount charged by a cost center for a service performed for a profit center.

6 As a general rule, the best transfer price to use to transfer the costs of a service center
to an operating department is
a. the price charged by an outside company for the same service.
b. the price that encourages goal congruence.
c. one that is based on budgeted variable cost.
d. one that is based on budgeted total cost.

7 From 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

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

9 Which 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

10 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
11 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 divisions variable costs
B. buying divisions 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

12 The 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

13 Which 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

14 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
15 If 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

16 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

17 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

18 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

19 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 XYZs 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

20 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

21 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

22 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 Divisions 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 23 through 25.

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.

23 Actual cost per unit amounts to

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

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

Questions 26 through 28 are based on the following information.

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, Im at capacity. By making the cushion seats for you, Ill 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. Id like to
sell it to you at variable cost, but I have excess demand for both products. I dont 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 dont 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 P 8.15 P 9.76
Cushioned seat
Padding 2.40 -
Vinyl 4.00 -
Molded seat 6.00
(purchased)
Direct labor
Frame fabrication 3.75 (.5xP7.50/DLH) 3.75
(.5x$7.50/DLH)
Cushion fabrication 3.75 -
(.5x$7.50/DLH)
Assembly* 3.75 (.3xP7.50/DLH) 2.25
(.5x$7.50/DLH)
Manufacturing
Overhead 19.20 (.8DLHxP12.80/D 10.24
(1.5DLHx$12.60/DLH) LH)
Total standard cost P45.00 P32.00
Selling price (30% P58.50 P41.60
markup)
* Attaching seats to frames and attaching rubber feet.

Office Division
Manufacturing Overhead Budget

Overhead Item Nature Amount

Supplies Variable at current market prices P
420,000
Indirect labor Variable 375,000
Supervision Nonvariable 250,000
Power Use varies with activity; rates are 180,000
fixed
Heat and light Nonvariable light is fixed 140,000
regardless of production while
heat/airconditioning varies with fuel
charges
Property taxes Nonvariable any change in 200,000
and insurance amounts/rates is independent of
taxes production
Depreciation Fixed dollar total 1,700,00
0
Employee 20% of supervision, direct and 575,000
benefits indirect labor
Total overhead P3,840,0
00
Capacity in DLH 300,000
Overhead rate/DLH P12.80
26 What is the transfer price per 100-unit lot based on variable manufacturing costs to
produce the modified cushioned seat?
a. P1,329 c. P789
b. P1,869 d. P1,986

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

28 What is the opportunity cost of the Office Division if 125 economy stools can be made in
the time required for 100 deluxe stools?
a. P789 c. P1,329
b. P1,869 d. P540

Questions 29 thru 30 are based on the following information.

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 P100. 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 P106 per unit. Its cost structure (on 15,000 units) is:

Variable production costs P70

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
29 What is the minimum of the transfer price range for a transfer between the two
divisions?
a. P96 c. P70
b. P90 d. P106

30 If the two divisions agree to transact with one another, corporate profits will
a. drop by P30,000 per month.
b. rise by P20,000 per month.
c. rise by P50,000 per month.
d. rise or fall by an amount that depends on the level of the transfer price.

The measure of a man is not how much he suffers in the test, but how he comes out at the
end.
Neal Shusterman, UnWholly