Screening Exam

Tranfer Pricing
Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1) ________ means minimum constraints and maximum freedom for managers at the lowest levels of an
organization to make decisions and to take actions.
A) Total centralization B) Use of market-based transfer pricing
C) Total decentralization D) Use of negotiated transfer pricing

2) An advantage of decentralization is that it:

A) creates greater responsiveness to local needs
B) focuses manager's attention on the organization as a whole
C) does not result in a duplication of activities
D) reduces the cost of gathering information

3) A product may be passed from one subunit to another subunit in the same organization. The product is
known as a(n):
A) interdepartmental product B) intermediate product
C) subunit product D) transfer product

4) Transfer prices should be judged by whether they promote:

A) goal congruence.
B) the balanced scorecard method.
C) a high level of subunit autonomy in decision making.
D) Both A and C are correct.

5) A transfer-pricing method leads to goal congruence when managers:

A) always act in their own best interest
B) act in their own best interest and the decision is in the long-term best interest of the manager's subunit
C) act in their own best interest and the decision is in the long-term best interest of the company
D) act in their own best interest and the decision is in the short-term best interest of the company

6) 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

7) The costs used in cost-based transfer prices:

A) are actual costs B) are budgeted costs
C) can either be actual or budgeted costs D) are lower than the market-based transfer
prices

Answer the following questions using the information below:

Penn Oil Corporation has two divisions, Refining and Production. The company's primary product is Luboil Oil. Each
division's costs are provided below:

Production: Variable costs per barrel of oil $9

Fixed costs per barrel of oil $6
Refining: Variable costs per barrel of oil $30
Fixed costs per barrel of oil $36

The Refining Division has been operating at a capacity of 40,000 barrels a day and usually purchases 25,000 barrels of oil
from the Production Division and 15,000 barrels from other suppliers at $60 per barrel.

8) What is the transfer price per barrel from the Production Division to the Refining Division, assuming the
method used to place a value on each barrel of oil is 180% of variable costs?
A) $16.20 B) $27.00 C) $54.00 D) $70.20

9) What is the transfer price per barrel from the Production Division to the Refining Division, assuming the
method used to place a value on each barrel of oil is 110% of full costs?
A) $16.50 B) $66.00 C) $72.60 D) $89.10
 10) Assume 200 barrels are transferred from the Production Division to the Refining Division for a transfer price
of $18 per barrel. The Refining Division sells the 200 barrels at a price of $120 each to customers. What is the
operating income of both divisions together?
A) $7,200 B) $7,800 C) $10,800 D) $20,400

Answer the following questions using the information below:

Greenlawn Corporation has two divisions, Distribution and Production. The company's primary product is fertilizer.
Each division's costs are provided below:

Production: Variable costs per pound $0.10

Fixed costs per pound $0.50
Distribution: Variable costs per pound $0.06
Fixed costs per pound $0.04

The Distribution Division has been operating at a capacity of 4,000,000 pounds a week and usually purchases 2,000,000
pounds from the Production Division and 2,000,000 pounds from other suppliers at $0.90 per pound.

11) What is the transfer price per barrel from the Production Division to the Distribution Division, assuming the
method used to place a value on each pound of fertilizer is 160% of variable costs?
A) $0.10 B) $0.22 C) $0.16 D) $0.80

12) What is the transfer price per barrel from the Production Division to the Distribution Division, assuming the
method used to place a value on each pound of fertilizer is 120% of full costs?
A) $0.60 B) $0.72 C) $0.90 D) $1.10

13) Assume 100,000 pounds are transferred from the Production Division to the Distribution Division for a
transfer price of $0.80 per pound. The Distribution Division sells the 100,000 pounds at a price of $1.10 each
to customers. What is the operating income of both divisions together?
A) $20,000 B) $30,000 C) $40,000 D) $50,000

Answer the following questions using the information below:

Calculate the Division operating income for the AlphaShoe Company which manufactures only one type of shoe and has
two divisions, the Sole Division, and the Assembly Division. The Sole Division manufactures soles for the Assembly
Division, which completes the shoe and sells it to retailers. The Sole Division "sells" soles to the Assembly Division. The
market price for the Assembly Division to purchase a pair of soles is $40. (Ignore changes in inventory.) The fixed costs
for the Sole Division are assumed to be the same over the range of 40,000-100,000 units. The fixed costs for the Assembly
Division are assumed to be $14 per pair at 100,000 units.

Sole's costs per pair of soles are:

Direct materials $8
Direct labor $6
Variable overhead $4
Division fixed costs $2

Assembly's costs per completed pair of shoes are:

Direct materials $12
Direct labor $4
Variable overhead $2
Division fixed costs $14

14) What is the market-based transfer price per pair of soles from the Sole Division to the Assembly Division?
A) $20 B) $32 C) $40 D) $52

15) What is the transfer price per pair of soles from the Sole Division to the Assembly Division if the method
used to place a value on each pair of soles is 180% of variable costs?
A) $28.80 B) $25.20 C) $32.40 D) $57.60

16) What is the transfer price per pair of shoes from the Sole Division to the Assembly Division per pair of soles
if the transfer price per pair of soles is 125% of full costs?
A) $20 B) $25 C) $26 D) $30
 17) Calculate and compare the difference in overall corporate net income between Scenario A and Scenario B if
the Assembly Division sells 100,000 pairs of shoes for $120 per pair to customers.
Scenario A: Negotiated transfer price of $30 per pair of soles
Scenario B: Market-based transfer price
A) $1,000,000 more net income under Scenario A B) $1,000,000 of net income using Scenario B
C) $200,000 of net income using Scenario A. D) None of these answers is correct.

18) Assume the transfer price for a pair of soles is 180% of total costs of the Sole Division and 40,000 of soles are
produced and transferred to the Assembly Division. The Sole Division's operating income is:
A) $640,000 B) $720,000 C) $800,000 D) $880,000

19) If the Assembly Division sells 100,000 pairs of shoes at a price of $120 a pair to customers, what is the
operating income of both divisions together?
A) $8,800,000 B) $6,800,000 C) $6,000,000 D) $5,200,000

Answer the following questions using the information below:

Division A sells ground veal internally to Division B, which in turn, produces veal burgers that sell for $10 per pound.
Division A incurs costs of $1.50 per pound while Division B incurs additional costs of $5.00 per pound.

20) What is Division A's operating income per pound, assuming the transfer price of the ground veal is set at
$2.50 per pound?
A) $1.00 B) $1.75 C) $2.50 D) $3.25

21) A benefit of using a market-based transfer price is the:

A) profits of the transferring division are sacrificed for the overall good of the corporation
B) profits of the division receiving the products are sacrificed for the overall good of the corporation
C) economic viability and profitability of each division can be evaluated individually
D) None of these answers is correct.

22) Crush Company makes internal transfers at 180% of full cost. The Soda Refining Division purchases 30,000
containers of carbonated water per day, on average, from a local supplier, who delivers the water for $30 per
container via an external shipper. To reduce costs, the company located an independent supplier in Missouri
who is willing to sell 30,000 containers at $20 each, delivered to Crush Company's Shipping Division in
Missouri. The company's Shipping Division in Missouri has excess capacity and can ship the 30,000
containers at a variable cost of $2.50 per container. What is the total cost to Crush Company if the carbonated
water is purchased from the local supplier?
A) $ 900,000 B) $1,200,000 C) $1,501,000 D) $1,620,000

23) A DISADVANTAGE of a negotiated transfer price is that:

A) each division manager must put forth effort to increase division operating income
B) negotiated transfer price preserves divisional autonomy
C) negotiations usually require much time and energy
D) Both B and C are correct.

24) Which of the following transfer-pricing methods always achieves goal congruence?
A) a market-based transfer price B) a cost-based transfer price
C) a negotiated transfer price D) full-cost plus a standard profit margin

25) The minimum transfer price equals:

A) opportunity costs less the additional outlay costs
B) opportunity costs times 125% plus the additional outlay costs
C) opportunity costs divided by the additional outlay costs
D) incremental costs plus opportunity costs

26) The seller of Product A has no idle capacity and can sell all it can produce at $60 per unit. Outlay cost is $12.
What is the opportunity cost, assuming the seller sells internally?
A) $12 B) $48 C) $60 D) $72