MODULE 7 (B.

TRANSFER PRICING)
THEORIES:
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 division 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
3. The basic methods used in transfer pricing are
a. variable or full costs
b. dual prices
c. market price or negotiated price
d. all of the above
4. A transfer pricing system should satisfy which of the following objectives?
a. accurate performance evaluation
b. preservation of divisional autonomy
c. goal congruence
d. all of the above
5. Transfer prices are
a. charges for transportation of goods outside units of an organization
b. charges for goods sold by subunits to outside customers.
c. charges goods exchanged among subunits.
d. charges for goods stored within a subunit.
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
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.
8. An
a.
b.
c.
d.

example of a transfer price policy is

market price.
actual cost plus markup.
standard cost plus markup.
all of the above.

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.
10. If a firm operates at capacity, the transfer price should be the:
a. external market price.
b. differential cost.
c. actual cost.
d. standard cost.
11. Negotiated 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.
12. To avoid waste and maximize efficiency when transferring products among divisions
in a competitive economy, a large diversified corporation should base transfer prices
on:
a. full cost
b. variable cost
c. replacement cost
d. market price
13. If 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.
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
a. the selling division's variable costs
b. the buying division's outside purchase price
c. the price that would allow the buying division to cover its incremental cost of
the special order
d. the price that would allow the selling division to maintain its current ROI
15. 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
16. If 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

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
18. 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 costs because the seller is well-advised to deal with the real rather than
anticipated costs
19. To minimize taxes, some multinational companies set low transfer prices
a. when goods are shipped from low tax countries to other low tax countries
b. when goods are shipped from low tax countries to high tax countries
c. when goods are shipped from high tax countries to low tax countries
d. c or b
20. Market 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
21. Variable 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
a. there is
b. there is
c. there is
d. there is

may consider using variable costs in transfer pricing when

excess capacity because variable costs would stay the same
no excess capacity because variable costs would not stay the same
excess capacity because fixed cost would stay the same
no excess capacity because fixed costs would stay the same

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 or b
24. Transfer 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

25. The 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 or c
26. The 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
27. Transfer prices are set by:
a. cost or cost plus
b. market prices
c. negotiation
d. all of the above
28. 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
29. 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
30. Market-based transfer prices are best for
a. The company when selling division is operating below capacity.
b. The company when the selling division is operating at capacity.
c. The buying division if it is operating at capacity.
d. The buying division.
31. The worst transfer -pricing method is to base the prices on
a. market prices
b. budgeted total costs
c. budgeted variable costs
d. actual total costs
32. 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
33. Which 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

34. The market price method satisfy a key objective of transfer pricing, namely:
a. objectivity
b. usability
c. consistency
d. reliability
35. Which of the following are transfer pricing models?
a. Variable cost method
b. Average price method
c. Market cost method
d. All of the above
36. Which 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 market price?
c. Is the selling unit operating at full capacity?
d. All of the above
PROBLEMS:
1. 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
B. 85,000
C. 90,000
D. 95,000
2. 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
B. P45
C. P43.75
D. P25
3. An appropriate transfer price between two divisions of the Reno Corporation can be
determined from the following data:
Fabrication Division
Market price of subassembly
Variable cost of subassembly
Excess capacity (in units)
Assembling Division
Number of units needed

P50
P20
1,000
900

What is the natural bargaining range for the two divisions?

A. Between P20 and P50
B. Any amount less than P50
C. Between P50 and P70
D. P50 is the only acceptable price

4. 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
B. P 13
C. P 11
D. P 9
5. 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
Number of units being sold on the
intermediate market
Selling price per unit on the intermediate
market
Variables costs per unit
Fixed costs per unit (based on capacity)
Fabrication Division:
Number of units needed for production
Purchase price per unit now being paid to
an outside supplier

200,000
200,000
P900
70
13
40,000
P86

The appropriate transfer price should be:

A. P90
B. P87
C. P70
D. P86
6. Assume that Division X has a product than 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
Number of units being sold on the
intermediate market
Selling price per unit on the intermediate
market
Variables costs per unit
Fixed costs per unit (based on capacity)
Division Y:
Number of units needed for production
Purchase price per unit now being paid to an
outside supplier

200,000
160,000
P75
60
8
40,000
P74

The minimum transfer price to be charged by the Division X should be:

A.
B.
C.
D.

P60
P75
P68
P74

7. 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:

Average units produced

Average units sold
Variable mfg cost per unit
Variable finishing cost per unit
Fixed divisional costs

Mining
150,000
P2
P75,000

Builders
150,000
P5
P125,000

The 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
B. P4 per unit
C. P7 per unit
D. P9 per unit
8. Chips Division manufactures 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
Number of circuit boards:
Produce 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.
9. Chips Division manufactures 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

Production cost per circuit board
Numbers of circuit boards:
Produced during the year
Sold to outside customers
Sold to Compo Division

P125
90
20,000
16,000
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
B. P125
C. P200
D. P300
10. The Black Division of Pluma Company produces a high quality market. Unit
production costs (based on capacity production of 100,000 units per year) follow:
Direct materials
Direct labor
Overhead (20% variable)
Other information
Sales price

P 60
25
15
120
20

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
B. P 91
C. P 88
D. P117
11. Use the following data to answer questions 11 through 13.
N & R Company transfer a product from division N to division R. Variable cost of this
product is anticipated to be P40 a unit ant 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
B. P92
C. P115
D. P120

12. The transfer price bases on actual variable costs plus 130% markup amounts to
A. P90
B. P92
C. P115
D. P120
13. The transfer price based on budgeted full cost plus 30% markup amounts to
A. P117
B. P140
C. P150
D. P156
14. 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 X Y Z'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
15. 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 X Y Z's overall profit if Bearing refuses the outside price and Motor decides
to buy inside?
A. no change
B. P20,000 decrease in XYZ profits
C. P35,000 decrease in XYZ profits
D. P10,000 increase in XYZ profits