Managerial Accounting Final Part 1

Pennington Company's Production Division was operating below capacity. Its Assembly Division had been buying a part for its final product XX-1 in the external market for $40 per unit and is now asking the Production Division to supply 10,000 units of this part for $30 per unit. The variable cost for the Production Department would be $22.00. What negotiated (hybrid) transfer price would allow each of the 2 parties to benefit equally? A. 40 B. 22 C. 25 D. 31 E. Some other amount

31

Calgary Lumber has a raw lumber division and a finished lumber division. The variable costs are as follows: Raw lumber division = $125 per 100 board-ft Finished lumber division= $145 per 100 board-feet of finished lumber Assume that there is no board-feet loss in processing raw lumber into finished lumber. Raw lumber can be sold at $175 per 100 board-feet. Finished lumber can be sold at$345 per 100 board-feet.Assume that internal transfers are made at 130% of Variable Cost. Calculate the operating income per 100 board-feet for the Finished lumber Division. A. 182.50 B. 37.50 C. 75.00 D. some other amount

37.50

Division S (seller) incurs variable cost of $80 per unit. There is unlimited demand for the output of Division S in the external market where the market price is $125 per unit. IF there is no excess capacity in Division S, what is the opportunity cost (per unit) for Division S if the transfer price to Division B is set at $100? A. 25 B. 45 C. Some other amount D. Zero opportunity cost E. 20

45

Division S (seller) incurs variable cost of $80 per unit. There is unlimited demand for the output of Division S in the external market where the market price is $125 per unit. IF there is excess capacity in Division S, what is the minimum transfer price Division S will accept to avoid incurring a loss? A. 80 B. Some other amount C. 125

80

Calgary Lumber has a raw lumber division and a finished lumber division. The variable costs are as follows: Raw lumber division = $125 per 100 board-ft Finished lumber division= $145 per 100 board-feet of finished lumberAssume that there is no board-feet loss in processing raw lumber into finished lumber. Raw lumber can be sold at $175 per 100 board-feet. Finished lumber can be sold at$345 per 100 board-feet.Assume that internal transfers are made at 130%. Which of the following statements is CORRECT? A. The incremental profit for the company by processing raw lumber further amounts to $25 per 100 board-feet. B. The finished lumber division will benefit from this transfer price. C. None of these statements are correct D. The raw lumber division will not be in favor of this transfer price if unlimited demand exists in the external market for raw lumber. E. All of these statements are correct

All of these statements are correct

In the article "Pitfalls of Cost-plus Transfer Pricing." which of the following suggestions were offered as potential resolutions to the problems associated with transfer pricing? A. All of these were proposed resolutions B. Avoid setting up divisions that sell to both external and internal customers C. Set up divisions that only sell to internal customers as cost centers whereby they are evaluated only on efficiency of operations D. Set all transfer prices at incremental cost and allow managers in the selling division to profit only from external sales of output E. Use a dual pricing system where the selling division shows revenue based on incremental cost + markup but the buying division is only charged the incremental cost (no markup)

All of these were proposed solutions

The most frequently used method for setting transfer prices is: A. Market-based B. Negotiated (hybrid) C. Cost-Based

Cost Based

Which of the following IS NOT a recommendation of the authors of "Multinational Transfer Pricing" in regard to multinational companies and the risk of "tax avoidance" penalties? A. Multinational companies are motivated to set transfer prices such that the division which operates in a "low tax rate" company recognizes more of the profit. B. Transfer prices between multinational divisions should be set as if the transaction were "an arm's length" transaction C. Divisional managers in multinational companies should exert their autonomy and negotiate for transfer prices that benefit their own divisions D. Transfer prices between multinational divisions should be set at market price in order to avoid "tax avoidance" penalties

Divisional managers in multinational companies should exert their autonomy and negotiate for transfer prices that benefit their own divisions

Why are budgeted rather than actual costs used for developing transfer price?

If selling division uses actual cost, inefficiencies can simple be pushed on to the buying price

The general minimum transfer pricing rule is: A. None of these B. Full cost + Opportunity Cost for the selling division C. Incremental Cost + Opportunity Cost for the selling division D. Full Cost + Markup for the selling division

Incremental Cost + Opportunity Cost for the selling division

Which of the following statements is CORRECT concerning transfer prices between Division S (seller ) and Division B (buyer)? A. Division managers are fully aware of the cost structure of other divisions and can see how decisions they make impact other divisions and the company as a whole. B. Divisional managers in a decentralized organization will tend to make decisions that improve overall company profits, even if the decision results in an operating loss for their division. C. To encourage operational efficiency in Division S, the transfer price when selling to Division B should be based on actual costs. D. None of these statements are Correct. E. All of these statements are Correct

None (None of these statements are correct)

Calgary Lumber has a raw lumber division and a finished lumber division. The variable costs are as follows: Raw lumber division = $125 per 100 board-ft Finished lumber division= $145 per 100 board-feet of finished lumber. Assume that there is no board-feet loss in processing raw lumber into finished lumber. Raw lumber can be sold at $175 per 100 board-feet. Finished lumber can be sold at$345 per 100 board-feet. The transfer price is set at 130% of variable cost. Assume Finished Lumber Division has a special order whereby the new customer offers to pay $300 per 100 board-feet. Also assume that both divisions have the capacity needed for this special order. Which of the following will likely result in regard to this special offer? A. The Finished Lumber Division will reject this special order and this decision will negatively impact overall company profits B. The Finished Lumber Division will accept this special order and this decision will positively impact overall company profits C. The Finished Lumber Division will accept this special order and this decision will negatively impact overall company profits D. The Finished Lumber Division will reject this special order and this decision will positively impact overall company profits

The Finished Lumber Division will reject this special order and this decision will negatively impact overall company profits

Pennington Company's Production Division was operating below capacity. Its Assembly Division had been buying a part for its final product XX-1 in the external market for $40 per unit and is now asking the Production Division to supply 10,000 units of this part for $30 per unit. The variable cost for the Production Department would be $22.00. IF the Production refuses to make the 10,000 parts for a transfer price of $30 because this is less than the $40 the Production Division is currently paying, what will be the financial impact for Meridian Company of this standoff between divisional managers? A. This will cost Meridian Company $100,000 B. There will be no impact on Meridian Company profits C. This will cost Meridian Company $400,000 D. This will cost Meridian Company $180,000

This will cost Meridian company 180,000

No excess/ At capacity =

Transfer price = Incremental + Opportunity cost

Excess/below capacity =

Transfer price = incremental (No opportunity)

Which statement best describes the effect of transfer pricing between Division S (seller) and Division B (buyer) on overall company profits? A. Transfer prices relate to internal transactions (between Division S and Division B) and therefore do not impact overall company profits B. Transfer prices do not directly impact company profits but can lead to decisions which do negatively impact overall profits. This negative impact on overall company profits is insidious and may not be transparent to division managers or top management. C. Transfer pricing directly impacts overall company profits as well as the profits of Divisions S and B. D. Transfer prices do not directly impact company profits but can lead to decisions which do negatively impact overall profits. This negative impact on overall company profits is obvious to division managers and top management.

Transfer prices do not directly impact company profits but can lead to decisions which do negatively impact overall profits. This negative impact on overall company profits is insidious and may not be transparent to division managers or top management.