ACCTG 338 Final Multiple Choice

Which of the following is a method for determining transfer​ prices? A. ​Market-based transfer prices B. Negotiated transfer prices C. ​Cost-based transfer prices D. All of the above

D. All of the above

Chade Corp. is considering a special order brought to it by a new client. If Chade determines the variable cost to be​ $9 per​ unit, and the contribution margin of the next best alternative of the facility to be​ $5 per​ unit, then if Chade​ has: A. Excess​ capacity, the selling price must be greater than​ $9 per unit. B. Full​ capacity, the selling price must be greater than​ $5 per unit. C. Excess​ capacity, the company will be profitable at​ $6 per unit. D. Full​ capacity, the company will be profitable at​ $4 per unit.

A. Excess​ capacity, the selling price must be greater than​ $9 per unit.

​Ace Cleaning Service is considering expanding into one or more new market areas. Which costs are relevant to Ace's decision on​ whether to expand? Sunk Costs | Variable Costs | Opportunity Costs A. No | Yes | Yes B. No | Yes | No C. Yes | No | Yes D. Yes | Yes | Yes

A. No | Yes | Yes

​"A component part should be purchased whenever the purchase price is less than its total manufacturing cost per​ unit." Do you​ agree? Why? A. No. Some of the total unit costs to manufacture a product may be fixed​ costs, and,​ hence, will not differ between the make and buy alternatives. These fixed costs are irrelevant to the​ make-or-buy decision. The key comparison is between purchase costs and the costs that will be saved if the company purchases the component parts from outside plus the additional benefits of using the resources freed up in the next best alternative use​ (opportunity cost). B. Yes. The cost of the component is comprised of fixed and variable costs. These costs make up the cost for the make alternative. The purchase cost is used in the buy alternative. The lowest cost alternative should always be selected when evaluating the decision to make or buy the component. C. No. The variable costs are costs the company will pay if the component is manufactured. Since these costs will be irrelevant if the component is​ purchased, only the fixed costs need to be evaluated in the​ make-or-buy decision. If the fixed costs are less than the purchase cost the component should be purchased. D. Yes. The fixed costs are costs the company will pay if the component is manufactured. Since these costs will be irrelevant if the component is​ purchased, only the variable costs need to be evaluated in the​ make-or-buy decision. If the variable costs are less than the purchase cost the component should be manufactured.

A. No. Some of the total unit costs to manufacture a product may be fixed​ costs, and,​ hence, will not differ between the make and buy alternatives. These fixed costs are irrelevant to the​ make-or-buy decision. The key comparison is between purchase costs and the costs that will be saved if the company purchases the component parts from outside plus the additional benefits of using the resources freed up in the next best alternative use​ (opportunity cost).

"Managers should always buy inventory in quantities that result in the lowest purchase cost per​ unit." Do you​ agree? Why? A. No. When deciding on the quantity of inventory to​ buy, managers must consider both the purchase cost per unit and the opportunity cost of funds invested in the inventory. For​ example, the purchase cost per unit may be low when the quantity of inventory purchased is​ large, but the benefit of the lower cost may be more than offset by the high opportunity cost of the funds invested in acquiring and holding inventory. B. Yes. It is always desirable to pay the lowest purchase price per unit possible for​ inventory, with no regards to the quantity that must be bought. C. Yes. Managers should place​ one-time-only special orders for large quantities to procure the lowest possible purchase price per unit. The special orders are placed with regards to the lowest price and does not take into account space for storing the inventory. D. No. When determining how much quantity of inventory to​ buy, managers must consider both the purchase cost per unit and the objective function. For​ example, the company must determine if it is their objective to always have a surplus of inventory so that they never encounter a shortage.

A. No. When deciding on the quantity of inventory to​ buy, managers must consider both the purchase cost per unit and the opportunity cost of funds invested in the inventory. For​ example, the purchase cost per unit may be low when the quantity of inventory purchased is​ large, but the benefit of the lower cost may be more than offset by the high opportunity cost of the funds invested in acquiring and holding inventory.

Which of the following​ is not a qualitative factor that Atlas Manufacturing should consider when deciding whether to buy or make a part used in manufacturing their​ product? A. Variable cost per unit of the product. B. Potential loss of trade secrets. C. Quality of the outside​ producer's product. D. Manufacturing deadlines and special orders.

A. Variable cost per unit of the product.

​"All transfer-pricing methods give the same division operating​ income." Do you​ agree? Explain. A. ​No, division operating incomes differ dramatically under the variable​ costs, full​ costs, and market price methods of transfer pricing. B. ​Yes, division operating incomes are virtually the same under the variable​ costs, full​ costs, and market price methods of transfer pricing.

A. ​No, division operating incomes differ dramatically under the variable​ costs, full​ costs, and market price methods of transfer pricing.

What properties should a a​ transfer-pricing system should​ have? ​(Select all responses that​ apply.) A. It should promote independent goal setting among divisions. B. It should promote goal congruence. C. It should motivate management effort. D. It should preserve a high level of subunit dependence in decision making. E. It should be useful for evaluating subunit performance. F. It should preserve a high level of subunit autonomy in decision making.

All that apply: B, C, E, F.

"Transfer pricing is confined to profit​ centers." Do you​ agree? Explain. A. Yes. Profit centers are the only ones that have to consider the opportunity cost of selling outside the organization B. No. A transfer price is the price one subunit of an organization charges for a product or service supplied to another subunit of the same organization. The two segments can be cost​ centers, profit​ centers, or investment centers. C. No. A transfer price is the price one subunit of an organization charges for a product or service supplied to another subunit of the same organization. The two segments must be cost centers. D. No. A transfer price is the price one subunit of an organization charges for a product or service supplied to another subunit of the same organization. The two segments must be investment centers.

B. No. A transfer price is the price one subunit of an organization charges for a product or service supplied to another subunit of the same organization. The two segments can be cost​ centers, profit​ centers, or investment centers.

​"Variable costs are always​ relevant, and fixed costs are always​ irrelevant." Do you​ agree? Why? A. Yes. Variable costs may differ among the alternatives under consideration​ and, hence, will be relevant. Fixed costs will not differ among the alternatives​ and, hence, will be irrelevant. B. No. Some variable costs may not differ among the alternatives under consideration​ and, hence, will be irrelevant. Some fixed costs may differ among the alternatives​ and, hence, will be relevant. C. Yes. To be relevant for a particular​ decision, a revenue or cost item must be an expected future revenue or expected future cost. Fixed costs will occur in the future​ and, hence are relevant. Variable costs may or may not occur in the future so they do not qualify as expected future costs​ and, hence, wll be irrelevant. D. No. Variable costs are viewed as a total amount and fixed costs are viewed on a per unit basis. Relevant costing focuses on unit costs and​ hence, the variable costs will be irrelevant and the total costs will be relevant.

B. No. Some variable costs may not differ among the alternatives under consideration​ and, hence, will be irrelevant. Some fixed costs may differ among the alternatives​ and, hence, will be relevant.

Define relevant costs. Why are historical costs​ irrelevant? A. Relevant costs are expected future costs that do not differ among the alternative courses of action being considered. Historical costs are irrelevant because they are past costs​ and, therefore, differ among alternative future courses of action. B. Relevant costs are expected future costs that differ among the alternative courses of action being considered. Historical costs are irrelevant because they are past costs​ and, therefore, cannot differ among alternative future courses of action. C. Relevant costs are past costs that do not differ among the alternative courses of action being considered. Historical costs are irrelevant because they are also past costs​ and, therefore, differ among alternative future courses of action. D. Relevant costs are past costs that differ among the alternative courses of action being considered. Historical costs are irrelevant because they are future costs​ and, therefore, cannot differ among alternative future courses of action.

B. Relevant costs are expected future costs that differ among the alternative courses of action being considered. Historical costs are irrelevant because they are past costs​ and, therefore, cannot differ among alternative future courses of action.

"Management should always maximize sales of the product with the highest contribution margin per​ unit." Do you​ agree? Why? A. No. Managers should aim to get the highest contribution margin per unit based on opportunity costs. The opportunity cost is the contribution to operating income that is forgone by not using a limited resource in its​ next-best alternative use. B. Yes. Managers should aim to get the highest contribution margin per unit. There are no other factors to take into consideration. C. No. Managers should aim to get the highest contribution margin per unit of the constraining factor. The constraining factor is what restricts or limits the production or sale of a given product. D. No. Managers should aim to get the highest contribution margin per unit of revenue. The revenue is what drives profits of a given product.

C. No. Managers should aim to get the highest contribution margin per unit of the constraining factor. The constraining factor is what restricts or limits the production or sale of a given product.

Define opportunity cost. A. The sum of all costs​ (variable and​ fixed) in a particular business function of the value​ chain, such as manufacturing costs or marketing costs. B. The additional total cost incurred for an activity. C. The contribution to income that is forgone​ (rejected) by not using a limited resource in its​ next-best alternative use. D. Expected future costs that differ among the alternative courses of action being considered.

C. The contribution to income that is forgone​ (rejected) by not using a limited resource in its​ next-best alternative use.

​"Under the general guideline for transfer​ pricing, the minimum transfer price will vary depending on whether the supplying division has unused capacity or​ not." Do you​ agree? Explain. A. Yes. The general​ transfer-pricing guideline specifies that the minimum transfer price equals the incremental cost per unit incurred up to the point of transfer plus the opportunity cost per unit to the supplying division. When the supplying division has idle​ capacity, its opportunity cost per unit is​ positive; when the supplying division has no idle​ capacity, its opportunity cost per unit is zero.​ Hence, the minimum transfer price will vary depending on whether the supplying division has idle capacity or not. B. Yes. The general​ transfer-pricing guideline specifies that the minimum transfer price equals the incremental cost per unit incurred up to the point of transfer minus the opportunity cost per unit to the supplying division. When the supplying division has idle​ capacity, its opportunity cost per unit is​ negative; when the supplying division has no idle​ capacity, its opportunity cost per unit is zero.​ Hence, the minimum transfer price will vary depending on whether the supplying division has idle capacity or not. C. Yes. The general​ transfer-pricing guideline specifies that the minimum transfer price equals the incremental cost per unit incurred up to the point of transfer plus the opportunity cost per unit to the supplying division. When the supplying division has idle​ capacity, its opportunity cost per unit is​ zero; when the supplying division has no idle​ capacity, its opportunity cost per unit is positive.​ Hence, the minimum transfer price will vary depending on whether the supplying division has idle capacity or not. D. No. The general​ transfer-pricing guideline specifies that the minimum transfer price equals the incremental cost per unit incurred up to the point of transfer. Opportunity cost is not factored into the​ price, therefore, the minimum transfer price will not vary depending on whether the supplying division has idle capacity or not.

C. Yes. The general​ transfer-pricing guideline specifies that the minimum transfer price equals the incremental cost per unit incurred up to the point of transfer plus the opportunity cost per unit to the supplying division. When the supplying division has idle​ capacity, its opportunity cost per unit is​ zero; when the supplying division has no idle​ capacity, its opportunity cost per unit is positive.​ Hence, the minimum transfer price will vary depending on whether the supplying division has idle capacity or not.

Below are the steps in the five-step sequence in a decision​ process, list them in the correct order. A. Make predictions about the future B. Implement the decision, evaluate performance, and learn C. Obtain information D. Make decisions by choosing among alternatives E. Identify the problem and uncertainties

Correct order: E, C, A, D, B.

Under what conditions is a​ market-based transfer price​ optimal? A. Transferring products or services at market prices generally leads to optimal decisions when there are no additional costs or benefits to the company as a whole from buying or selling in the external market instead of transacting internally. B. Transferring products or services at market prices generally leads to optimal decisions when interdependencies of subunits are minimal. C. Transferring products or services at market prices generally leads to optimal decisions when the market for the intermediate product market is perfectly competitive. D. All of the above are correct.

D. All of the above are correct.

What is one potential limitation of​ full-cost-based transfer​ prices? A. They can lead to suboptimal decisions for the company as a whole. B. Buying products or services outside the company when it is beneficial to overall company profitability to source them internally. C. The supplying division may not have sufficient incentives to control costs if the​ full-cost-based transfer price uses actual costs rather than standard costs. D. All of the above are correct.

D. All of the above are correct.

​"Cost and price information play no role in negotiated transfer​ prices." Do you​ agree? Explain. A. Agree. Cost and price information play no role in negotiated transfer prices because the transfer price is set by management. B. Disagree.​ Costs, particularly variable costs of the selling​ division, serves as a​ "ceiling" above which the selling division would be unwilling to sell. Prices that the buying division would pay to purchase products from the outside market serves serve as a​ "floor" below which the buying division would be unwilling to buy. C. Agree. The price and cost information have no specific relationship to the transfer price negotiated by the two divisions. D. Disagree.​ Costs, particularly variable costs of the selling​ division, serve as a​ "floor" below which the selling division would be unwilling to sell. Prices that the buying division would pay to purchase products from the outside market serves as a​ "ceiling" above which the buying division would be unwilling to buy.

D. Disagree.​ Costs, particularly variable costs of the selling​ division, serve as a​ "floor" below which the selling division would be unwilling to sell. Prices that the buying division would pay to purchase products from the outside market serves as a​ "ceiling" above which the buying division would be unwilling to buy.