Pricing Intermediate Products: (Internal Transfer Pricing)

Questions
1. The biggest challenge in making a decentralized organization function effectively is:
A. earning maximum profits through fair practices. B. minimizing losses.
C. taking advantage of specialized knowledge and skills of highly talented managers.
D. obtaining goal congruence among division managers.

2. What practice best describes when divisional managers throughout an organization work
together to achieve the organization's goals?
A. Participatory management. B. Goal attainment.
C. Goal congruence. D. Centralization of objectives.

3. ROI is most appropriately used to evaluate the performance of:

A. cost center managers. B. revenue center managers.
C. profit center managers. D. investment center managers.

4. The price used to record a sale between divisions within the same vertically integrated
company is called the
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a. sales price. b. integrated price. C. transfer price. d. bargain price.
5. The overall objective in the determination of a transfer price is to
a. maximize the return of the selling division.
b. minimize the cost to the purchasing division.
c. minimize the return of the selling division.
d. maximize the return to the whole company.
6 - The general formula for the minimum transfer price is: minimum transfer price =
a. fixed cost + opportunity cost. b. external purchase price.
c. total cost + opportunity cost. D. variable cost + opportunity cost.

7 - In the formula for the minimum transfer price, opportunity cost is the __________ of
the goods sold externally.
a. variable cost b. total cost c. selling price d. contribution
margin

8 - The maximum transfer price from the buying division's stand point is the
a. total cost + opportunity cost. b. variable cost + opportunity cost.
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c. external purchase price. d. external purchase price + opportunity cost.
9-10 The Wood Division of Fir Products, Inc. manufactures rubber moldings and
sells them externally for $110. Its variable cost is $50 per unit, and its fixed cost
per unit is $14. Fir's president wants the Wood Division to transfer 5,000 units to
another company division at a price of $64.

9 - Assuming the Wood Division has available capacity of 5,000 units, the minimum
transfer price it should accept is
a. $14. b. $50. c. $64. d. $110.

10 - Assuming the Wood Division does not have any available capacity, the
minimum transfer price it should accept is
a. $14. b. $50. c. $64. d. $110.

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11 , 12 - Management of the Catering Company would like the Food Division to
transfer 10,000 cans of its final product to the Restaurant Division for $80. The Food
Division sells the product to customers for $140 per unit. The Food Division’s
variable cost per unit is $70 and its fixed cost per unit is $20.
11 - If the Food Division is currently operating at full capacity, what is the minimum
transfer price the Food Division should accept?
a. $20 b. $70 c. $90 d. $140

12 - If the Food Division has 10,000 units available capacity, what is the minimum
transfer price the Food Division should accept?
a. $20 b. $70 c. $90 d. $140
13 , 14 - The Selling Division’s unit sales price is $15 and its unit variable cost is $9. Its
capacity is 10,000 units. Fixed costs per unit are $4. Current outside sales are 8,000
units.
13 - What is the Selling Division’s opportunity cost per unit from selling 2,000 units to
the Purchasing Division?
a. $6 b. $15 c. $2 d. $0
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14 - What is the Selling Division’s opportunity cost per unit from selling 3,000 units
to the Purchasing Division?
a. $6 b. $15 c. $2 d. $0
15 - In the minimum transfer price formula, variable cost is defined as the variable
cost of
a. all units sold, both internally and externally.
b. units sold externally. c. units not sold. d. units sold internally.
16 - Under the negotiated transfer pricing approach, the minimum transfer price is
established by the
a. purchasing division. b. corporate headquarters management.
c. selling division. d. corporate negotiator.

17 - Under the negotiated transfer pricing approach, the maximum transfer price is
established by the
a. purchasing division. b. corporate headquarters management.
c. selling division. d. corporate negotiator. 5
 18-20- Division of Paul Bunyon Homes Inc. produces and sells lumber that can be
sold to outside customers or within the company to the Construction Division. The
following data have been gathered for the coming period:
Lumber Division:
Capacity 200,000 board feet Variable production cost per bd. ft. $1.00
Variable selling cost per bd. ft. $0.40 Price per board foot $2.00
Construction Division:
Board feet needed 60,000 Outside price paid per bd. ft. $1.60
If there is internal transfer , $0.30 per board foot can be saved in shipping costs.
18 - If current outside sales are 130,000 board feet, what is the minimum transfer
price that the Lumber Division could accept?
a. $1.00 b. $1.10 c. $1.40 d. $2.00
19 - If current outside sales are 150,000 board feet, what is the minimum transfer
price that the Lumber Division could accept?
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a. $1.60 b. $1.20 c. $1.10 d. $1.70
20 - If the Lumber Division has excess capacity to fulfill the Construction Division’s
needs, what will be the effect on the company’s overall contribution margin?
a. Decrease by $24,000 b. Decrease by $18,000
c. Increase by $30,000 d. Increase by $27,000
21 , 22 – Sokal Inc. manufactures and sells motorcycles. The Engine Division produces
and sells engines to other motorcycle companies and internally to the Production
Division. It has been decided that the Engine Division will sell 20 units to the
Production Division at $700 a unit. The Engine Division, currently operating at
capacity, has a unit sales price of $1,700 and unit variable costs and fixed costs of
$700 and $500. The Production Division is currently paying $1,600 per unit to an
outside supplier. $60 per unit can be saved on internal sales from reduced selling
expenses.
21- What is the minimum transfer price that the Engine Division should accept?
a. $1,640 b. $1,700 c. $1,600 d. $1,000
22 - What is the increase/decrease in the company profits if this transfer takes place?
a. Decrease $800 b. Increase $1,680
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c. Decrease $2,000 d. Increase $18,000
23 , 224 - The Dairy Division of Famous Foods, Inc. produces and sells milk to outside
customers. The operation has the capacity to produce 250,000 gallons of milk a year.
Last year’s operating results were as follows:
Sales (200,000) gallons $500,000
Variable costs 312,000
Contribution margin 188,000
Fixed costs 100,000
Net Income $ 88,000
23 - Assume the Yogurt Division wants to purchase 30,000 gallons of milk from the Dairy
Division. The minimum price that will increase the Dairy Division’s profit is
a.2.50 per gallon. b. $0.94 per gallon. c. $1.56 per gallon. d. $0.44 per gallon.
24 - Assume the Dairy Division is operating at capacity. If the Yogurt Division wants to
purchase 30,000 gallons of milk from the Dairy Division, what is the minimum price
that will allow the Dairy Division to maintain its current net income?
a.$2.50 per gallon b. $0.94 per gallon c. $1.56 per gallon d. $0.44 per gallon

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 25 , 26 - Division A makes a part with the following characteristics:

Production capacity in units 15,000 units

Selling price to outside customer $ 25
Variable cast per unit $18
Fixed cost per unit $ 4
Division B, another division of the same company, would like to purchase 5,000 units of
the part each period from Division A. Division B is now purchasing these parts from
an outside supplier at a price of $24 each.
25. If Division A has idle capacity to handle all of Division B's needs. If Division B
continues to purchase parts from an outside supplier , the company as a whole will
be:
A. worse off by $30,000 each period. B. worse off by $10,000 each period.
C. better off by $15,000 each period. D. worse off by $35,000 each period.
26. If Division A is operating at capacity If Division A sells the parts to Division B at
$24 per unit (Division B's outside price), the company as a whole will be:
A. better off by $5,000 each period. B. worse off by $15,000 each period.
C. worse off by $5,000 each period. 9
D. There will be no change in the status of the company as a whole.
27 – 34 Sokal Inc. manufactures and sells motorcycles. The Engine Division
produces and sells engines to other companies and internally to the
Production Division. The Engine Division has a unit sales price of $70 and a
unit variable costs 30 and a unit fixed cost $20. The Production Division is
currently paying $60 per unit from an outside supplier. $5 per unit can be
saved on internal sales from reduced selling expenses.
27 - If Engine Division has idle capacity, what is the minimum transfer price
that the Engine Division should accept?
a. $30 b. $25 c. $50 d. $40
28 - If Engine Division currently operating at capacity, what is the minimum
transfer price that the Engine Division should accept?
a. $65 b. $70 c. $90 d. $80

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29, 30, 31: Assume that Engine Division has idle capacity. It has been decided
that the Engine Division will sell 2,000 units to the Production Division at price
$45 a unit.
29 - The effect on the Engine Division profits if this transfer takes place will be:
a. Decrease 20,000 b. Decrease $30,000
c. increase $40,000 d. increase $60,000
30- The effect on the production division profits if this transfer takes place will be:
a. increase $30,000 b. increase $10,000
c. Decrease $20,000 d. Decrease $30,000
31 - The effect on the company profits if this transfer takes place will be:
a. increase $30,000 b. increase $70,000
c. Decrease $10,000 d. Decrease $30,000

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32,33,34 - Assume that Engine Division operating at capacity. It has been
decided that the Engine Division will sell 2,000 units to the Production Division at
$55 a unit.
32 - The effect on the Engine Division profits if this transfer takes place will be:
a. Decrease 20,000 b. Decrease $30,000
c. increase $50,000 d. increase $60,000

33 - The effect on the Production Division profits if this transfer takes place will
be:
a. increase $30,000 b. increase $10,000
c. Decrease $20,000 d. Decrease $30,000

34 - The effect on the company profits if this transfer takes place will be:
a. increase $30,000 b. increase $10,000
c. Decrease $10,000 d. Decrease $30,000
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