Managerial Accounting 5th Edition By Eric Noreen – Test Bank

1) The selling division in a transfer pricing situation should want the transfer price to cover at least the full cost per unit plus the lost contribution margin per unit on outside sales.

Answer: FALSE
Difficulty: 2 Medium
Topic: Transfer Pricing
Learning Objective: 11-05 (Appendix 11A) Determine the range, if any, within which a negotiated transfer price should fall.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Critical Thinking

2) From the buying division’s perspective, when a transferred item can be purchased from an outside supplier, the price charged by the outside supplier represents an upper bound on the charge that should be made on transfers between the selling and buying divisions.

Answer: TRUE
Difficulty: 2 Medium
Topic: Transfer Pricing
Learning Objective: 11-05 (Appendix 11A) Determine the range, if any, within which a negotiated transfer price should fall.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Critical Thinking

3) Whenever the selling division must give up outside sales in order to sell internally, it has an opportunity cost that should be considered in setting the transfer price.

Answer: TRUE
Difficulty: 2 Medium
Topic: Transfer Pricing
Learning Objective: 11-05 (Appendix 11A) Determine the range, if any, within which a negotiated transfer price should fall.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Critical Thinking

4) The transfer price used for internal transfers between divisions of the same company cannot affect the divisions’ reported profits.

Answer: FALSE
Difficulty: 1 Easy
Topic: Transfer Pricing
Learning Objective: 11-05 (Appendix 11A) Determine the range, if any, within which a negotiated transfer price should fall.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Critical Thinking

5) When a dispute arises over a transfer price, top managers should intervene to keep divisional managers from making a costly mistake, even though the divisions are evaluated as profit centers.

Answer: FALSE
Difficulty: 2 Medium
Topic: Transfer Pricing
Learning Objective: 11-05 (Appendix 11A) Determine the range, if any, within which a negotiated transfer price should fall.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Critical Thinking

6) Setting transfer prices at full cost can lead to bad decisions because, among other reasons, full cost does not take into account opportunity costs.

Answer: TRUE
Difficulty: 2 Medium
Topic: Transfer Pricing
Learning Objective: 11-05 (Appendix 11A) Determine the range, if any, within which a negotiated transfer price should fall.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Critical Thinking

7) If transfer prices are to be based on cost, then the costs should be actual costs rather than standard costs.

Answer: FALSE
Difficulty: 2 Medium
Topic: Transfer Pricing
Learning Objective: 11-05 (Appendix 11A) Determine the range, if any, within which a negotiated transfer price should fall.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Critical Thinking

8) Wengert Products, Inc., has a Motor Division that manufactures and sells a number of products, including a standard motor. Data concerning that motor appear below:

Capacity in units 40,000
Selling price to outside customers $ 59
Variable cost per unit $ 17
Fixed cost per unit (based on capacity) $ 21

The Automotive Division of Wengert Products, Inc needs 8,000 special heavy-duty motors per year. The Motor Division’s variable cost to manufacture and ship this special motor would be $20 per unit. Because these special motors require more manufacturing resources than the standard motor, the Motor Division would have to reduce its production and sales of standard motors to outside customers from 40,000 units per year to 27,200 units per year.

What is the total contribution margin on sales to outside customers that the Motor Division would give up if it were to make the special motors for the Automotive Division?
A) $336,000
B) $537,600
C) $860,160
D) $755,200

Answer: B
Explanation: To produce the 8,000 special motors, the Motor Division will have to give up sales of 12,800 of the regular motors to outside customers.

Selling price to outside customers $ 59
Variable cost per unit $ 17
Unit contribution margin $ 42
Reduction in outside unit sales 12,800
Total contribution margin on lost sales $ 537,600

Difficulty: 2 Medium
Topic: Transfer Pricing
Learning Objective: 11-05 (Appendix 11A) Determine the range, if any, within which a negotiated transfer price should fall.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: FN Measurement; BB Critical Thinking

9) Godina Products, Inc., has a Receiver Division that manufactures and sells a number of products, including a standard receiver that could be used by another division in the company, the Industrial Products Division, in one of its products. Data concerning that receiver appear below:

Capacity in units 58,000
Selling price to outside customers $ 89
Variable cost per unit $ 35
Fixed cost per unit (based on capacity) $ 42

The Industrial Products Division is currently purchasing 10,000 of these receivers per year from an overseas supplier at a cost of $81 per receiver.

Assume that the Receiver Division is selling all of the receivers it can produce to outside customers. Does there exist a transfer price that would make both the Receiver and Industrial Products Division financially better off than if the Industrial Products Division were to continue buying its receivers from the outside supplier?
A) Yes, both divisions are always better off regardless of whether the selling division has enough idle capacity to handle all of the buying division’s needs.
B) Yes, the minimum transfer price that the selling division should be willing to accept is less than the maximum transfer price that the buying division should be willing to accept.
C) The answer cannot be determined from the information that has been provided.
D) No, the minimum transfer price that the selling division should be willing to accept exceeds the maximum transfer price that the buying division should be willing to accept.

Answer: D
Explanation: The total contribution margin on lost sales is computed as follows:

Selling price to outside customers $ 89
Variable cost per unit $ 35
Unit contribution margin $ 54
Reduction in outside unit sales 10,000
Total contribution margin on lost sales $ 540,000

From the perspective of the selling division, profits would increase as a result of the transfer if and only if:

Transfer price > Variable cost per unit + (Total contribution margin on lost sales ÷ Number of units transferred)

Transfer price > $35 per unit + ($540,000 ÷ 10,000 units) = $35 per unit + $54 per unit = $89 per unit

From the perspective of the purchasing division, the transfer is financially attractive if and only if:

Transfer price < Cost of buying from outside supplier

Transfer price < $81 per unit

No transfer will be made between the two divisions because the minimum price that the selling division is willing to accept is greater than the maximum price that the buying division is willing to pay.
Difficulty: 1 Easy
Topic: Transfer Pricing
Learning Objective: 11-05 (Appendix 11A) Determine the range, if any, within which a negotiated transfer price should fall.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: FN Measurement; BB Critical Thinking

10) Division Delta of Golvin Corporation makes and sells a single product which is used by manufacturers of fork lift trucks. Presently it sells 9,000 units per year to outside customers at $57 per unit. The annual capacity is 10,000 units and the variable cost to make each unit is $32. Division Echo of Golvin Corporation would like to buy 2,000 units a year from Division Delta to use in its products. There would be no cost savings from transferring the units within the company rather than selling them on the outside market. What should be the lowest acceptable transfer price from the perspective of Division Delta?
A) $57.00 per unit
B) $19.50 per unit
C) $34.50 per unit
D) $32.00 per unit

Answer: C
Explanation: Available capacity for outside sales = Capacity − Internal sales

= 10,000 units − 2,000 units = 8,000 units

Lost outside sales = Total outside demand − Available capacity for outside sales

= 9,000 units − 8,000 units = 1,000 units

From the perspective of the selling division, profits would increase as a result of the transfer if and only if:

Transfer price > Variable cost per unit + Opportunity cost per unit

Transfer price > Variable cost per unit + (Total contribution margin on lost sales ÷ Number of units transferred)

Total contribution margin on lost sales = 1,000 units × ($57 per unit − $32 per unit) = $25,000

Transfer price > $32 per unit + ($25,000 ÷ 2,000 units) = $32 per unit + $12.50 per unit = $34.50 per unit
Difficulty: 2 Medium
Topic: Transfer Pricing
Learning Objective: 11-05 (Appendix 11A) Determine the range, if any, within which a negotiated transfer price should fall.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: FN Measurement; BB Critical Thinking