Appendix 11A Transfer Pricing: Managerial Accounting For Managers, 5e (Noreen)

 

 Managerial Accounting for Managers, 5e (Noreen) 5e  (Noreen) Appendix 11A Transfer Pricing

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 u p 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

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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, amon among g 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

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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

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

Capacity in units Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

40,000 $ 59 $ 17 $ 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 the se 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 the 8,000 special motors, the Motor Division Division will have to give up sales of 12,800 of the regular motors to outside customers.

Selling price to outside customers Variable cost per unit Unit contribution margin Reduction in outside unit sales

$ $ $

59 17 42 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

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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 Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

58,000 $ 89 $ 35 $ 42

The Industrial Products Division is currently purchasing 10,000 of these receivers receive rs per year from an overseas supplier at a cost of $81 $8 1 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 b oth 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 sho uld be willing to accept exceeds the maximum transfer price that the buying division should be willing to accept.

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

Selling price to outside customers Variable cost per unit Unit contribution margin Reduction in outside unit sales Total contribution margin on lost sales

$ $ $

89 35 54 10,000 $ 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 co ntribution margin on lost sales ÷ Number of units transferred) Transfer price > $35 per unit + ($540,000 ÷ 10,000 units) = $35 per unit + $54 per u unit nit = $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 max imum 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

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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 ou tside 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 outside sales = Capacity − Internal sales  sales  = 10,000 units − 2,000 units = 8,000 units  units  Lost outside sales = Total Total outside demand − Available capacity cap acity for outside sales sales   = 9,000 units − 8,000 units = 1,000 units  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 co ntribution 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 $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

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11) The Southern Division of Barstol Company makes and sells a single product, which is a part used in manufacturing trucks. The annual production capacity is 12,000 units and the variable cost of each unit is $35. Presently the Southern Division sells 11,000 units per year yea r to outside customers at $49 per unit. The Northern Division of Barstol Company would like to buy 4,000 units a year from Southern to use u se in its production. There would be no savings in variable costs from transferring the units internally rather than selling them externally. The lowest acceptable transfer price from the standpoint of the Southern Division should be closest to: A) $45.50 per unit B) $35.00 per unit C) $32.00 per unit D) $49.00 per unit Answer: A Explanation: Available capacity for outside outside sales = Capacity − Internal sales  sales  = 12,000 units − 4,000 units = 8,000 units  units  Lost outside sales = Total outside demand − Available Available capacity for outside sales = 11,000 units − 8,000 units = 3,000 units  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 co st per unit Transfer price > Variable cost per unit + (Total contribution co ntribution margin on lost sales ÷ Number of units transferred) Total contribution margin on lost sales = 3,000 units × ($49 per unit − $35 per unit) = $42,000 $42,000   Transfer price > $35 per unit + ($42,000 ÷ 4,000 units) = $35.00 per unit + $10.50 per unit = $45.50 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

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12) Toldness Products, Inc., has a Connector Co nnector Division that manufactures and sells a number of  products, including a standard connector that could be used by another division in the company, the Transmission Division, in one of its products. Data concerning that connector appear below:

Capacity in units Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

57,000 $ 67 $ 22 $ 29

The Transmission Division is currently purchasing 11,000 of these connectors connec tors per year from an overseas supplier at a cost of $58 per connector. What is the maximum price that the Transmission Division should be willing to pay for connectors transferred from the Connector Division? A) $51 per unit B) $58 per unit C) $22 per unit D) $29 per unit Answer: B Explanation: From the perspective of the purchasing division, the transfer is is financially attractive if and only if: Transfer price < Cost of buying from outside supplier Transfer price < $58 per unit 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

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13) Blitch Products, Inc., has a Screen Division that manufactures and sells a number of  products, including a standard screen that could be used by another division in the company, the Home Security Division, in one of its products. Data concerning that screen appear below:

Capacity in units Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

45,000 $ 53 $ 26 $ 16

The Home Security Division is currently purchasing 2,000 of these screens per year from an overseas supplier at a cost of $50 per screen. Assume that the Screen Division has enough idle capacity to handle all of the Home Security Division's needs. Does there exist a transfer price that would make both the Screen and Home Security Division financially better off than if the Home Security Division were to continue  buying its screens 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) The answer cannot be determined from the information that has been provided. C) 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 would accept. D) No, the selling division's price to outside customers is higher than the price that the buying division has to pay its outside supplier.

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Answer: C Explanation: From the perspective of the selling division, profits would increase as a result result of the transfer if and only if: Transfer price > Variable cost per unit + (Total contribution co ntribution margin on lost sales ÷ Number of units transferred) Transfer price > $26 per unit + ($0 ÷ 2,000 units) = $26 per u unit nit + $0 per unit = $26 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 < $50 per unit Both divisions would be financially better off making the transfer at any transfer price between $26 per unit and $50 per unit. 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

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14) If the lowest acceptable transfer price from the viewpoint of the selling division is $75 and the opportunity cost per unit on outside sales is $24, then the variable cost per unit must be: A) $24 per unit B) $99 per unit C) $51 per unit D) $75 per unit Answer: C Explanation: 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 co st per unit = $75 per unit un it Variable cost per unit + $24 per unit = $75 per unit Variable cost per unit = $75 per unit –  unit –  $24  $24 per unit = $51 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

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15) Lumpkins Products, Inc., has a Valve V alve Division that manufactures and sells a number of  products, including a standard valve that could be used by another division in the company, the Pump Division, in one of its products. Data concerning that valve appear below:

Capacity in units Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

46,000 $ 62 $ 38 $ 12

The Pump Division is currently purchasing 9,000 9,00 0 of these valves per year from an overseas supplier at a cost of $59 per valve. Assume that the Valve Division is selling all of the valves it can produce to outside customers. Also assume that none of the variable expenses can be avoided on transfers within the company. What should be the minimum acceptable transfer t ransfer price for the valves from the standpoint of the Valve Division? A) $50 per unit B) $38 per unit C) $62 per unit D) $59 per unit

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

Selling price to outside customers Variable cost per unit Unit contribution margin Reduction in outside unit sales Total contribution margin on lost sales

$ $ $

62 38 24 9,000 $ 216,000

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 co ntribution margin on lost sales ÷ Number of units transferred) Transfer price > ($38 per unit − $0 per unit) + ($216,000 ÷ 9,000 units) = $38 per unit + $24 per unit = $62 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

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16) Division G makes a part that it sells to customers outside of the company. Data con concerning cerning this part appear below:

Selling price to outside customers Variable cost per unit Total fixed costs Capacity in units

$ 87 $ 49 $ 40,000 4,000

Division H of the same company would like to use the part manufactured by Division G in one of its products. Division H currently purchases a similar part made by an outside company for $83 per unit and would substitute the part made by Division G. Division H requires 500 units of the part each period. Division G has ample capacity to produce the units for Division H without any increase in fixed costs and without cutting into sales to outside customers. If Division G sells to Division H rather than to outside customers, the variable v ariable cost be unit would be $2 $ 2 lower. What should be the lowest acceptable transfer price from the perspective of Division G? A) $47 B) $87 C) D) $83 $57 Answer: A Explanation: Because Division G has ample excess capacity and consequently there is no opportunity cost, the lowest price the part should be sold for is the variable cost that would be incurred or $47 per unit (= $49 per unit − $2 per unit).  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

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17) Nanke Products, Inc., has a Sensor Division that manufactures and sells a number of  products, including a standard sensor that could be used by another division in the company, the Safety Products Division, in one of its products. Data concerning that sensor appear below:

Capacity in units Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

58,000 $ 64 $ 20 $ 17

The Safety Products Division is currently purchasing 3,000 of these sensors per year from an overseas supplier at a cost of $59 per sensor. Assume that the Sensor Division is selling all of the sensors it can produce p roduce to outside customers. What should be the minimum acceptable transfer price for the sensors from the standpoint of the Sensor Division? A) $37 per unit B) $59 per unit C) D) $20 $64 per per unit unit

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

Selling price to outside customers Variable cost per unit Unit contribution margin Reduction in outside unit sales Total contribution margin on lost sales

$ $ $

64 20 44 3,000 $ 132,000

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 co ntribution margin on lost sales ÷ Number of units transferred) Transfer price > $20 per unit + ($132,000 ÷ 3,000 units) = $20 per unit + $44 per unit = $64 per unit 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

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18) Mittan Products, Inc., has a Antennae Antenn ae Division that manufactures and sells a number of  products, including a standard antennae that could be used by another division in the company, the Aircraft Products Division, in one of its products. Data concerning that antennae appear  below:

Capacity in units Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

68,000 $ 68 $ 34 $ 22

The Aircraft Products Division is currently purchasing 4,000 of these antennaes per year from an overseas supplier at a cost of $66 per antennae. Assume that the Valve Division is selling all of the valves it can produce to outside customers. From the standpoint of the Valve Division, what is the lost contribution margin if the valves are transferred internally rather than sold to outside customers? A) $48,000 B) C) $136,000 $2,312,000 D) $152,000 Answer: B Explanation: The total contribution margin on lost sales is computed as follows:

Selling price to outside customers Variable cost per unit Unit contribution margin Reduction in outside unit sales Total contribution margin on lost sales

$ $ $

68 34 34 4,000 $ 136,000

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

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19) Division E of Harveq Company has the capacity for making 6,000 motors per month and regularly sells 5,400 motors each month to outside customers at a contribution margin of $54 per motor. The variable cost per motor is $41. $4 1. Division F of Harveq Company would like to obtain 900 motors each month from Division E. What should be the lowest acceptable transfer price from the perspective of Division E? A) $59.00 per unit B) $54.00 per unit C) $41.00 per unit D) $18.00 per unit Answer: A Explanation: Available capacity for outside sales = Capacity Capacity − Internal sales  sales  = 6,000 units − 900 units = 5,100 units  units  Lost outside sales = Total outside demand − Available capacity for outside sales sales   = 5,400 units − 5,100 units = 300 units  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 co st per unit Transfer price > Variable cost per unit + (Total contribution co ntribution margin on lost sales ÷ Number of units transferred) Total contribution margin on lost sales = 300 units × $54.00 per unit = $16,200 Transfer price > $41 per unit + ($16,200 ÷ 900 units) = $41 per unit + $18 per unit = $59 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

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20) The Northern Division of Fiscar Corporation sells Part X2 to other o ther companies for $87.20 per p er unit. According to the company's cost accounting system, the costs to Northern Division to make a unit of Part X2 are:

Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead

$ 42.70 $ 5.80 $ 9.60 $ 4.50

The Southern Division of Fiscar Corporation uses a part much like Part X2 in one of its products. The Southern Division can buy this part from an outside supplier for $79.95 per unit. However, the Southern Division could use Part X2 instead of this part that it purchases from outside suppliers. What is the most that the Southern Division would be willing to pay the Northern Division for Part X2? A) $87.20 per unit B) $62.60 per unit C) $58.10 per unit D) $79.95 per unit Answer: D Explanation: The Southern Division would be willing to pay at most $79.95 for the part  because it can buy this part from an outside supplier for $79.95. 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

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21) Siegrist Products, Inc., has a Pump Division that manufactures and sells a number of  products, including a standard pump that could be used by another division in the company, the Pool Products Division, in one of its products. Data concerning that pump appear below:

Capacity in units Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

83,000 $ 60 $ 36 $ 11

The Pool Products Division is currently purchasing 12,000 of these pumps per year from an overseas supplier at a cost of $54 per pump. Assume that the Pump Division has enough idle capacity to handle all of the Pool Products Division's needs. What should be the minimum acceptable transfer price for the pumps from the standpoint of the Pump Division? A) $47 per unit B) $60 per unit C) D) $36 $54 per per unit unit Answer: C Explanation: From the perspective of the selling division, profits would increase as a result result of the transfer if and only if: Transfer price > Variable cost per unit + (Total contribution co ntribution margin on lost sales ÷ Number of units transferred) Transfer price > $36 per unit + ($0 ÷ 12,000 units) = $36 per unit + $0 per unit = $36 per unit 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

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22) Division C makes a part that it sells to customers outside of the company. Data concerning this part appear below:

Selling price to outside customers Variable cost per unit Total fixed costs Capacity in units

$ 75 $ 54 $ 150,000 10,000

Division D of the same company would like to use the part manu manufactured factured by Division C in one of its products. Division D currently purchases a similar part made by an outside company for $79  per unit and would substitute the part made by Division C. Division D requires 1,000 units of the  part each period. Division C has ample excess capacity to handle all of Division D's needs without any increase in fixed costs and without cutting into outside sales. What is the lowest acceptable transfer price from the standpoint of the selling division? A) $75 B) $79 C) $54 D) $69 Answer: C Explanation: Because there is no opportunity opportunity cost, the selling division should not accept any transfer price less than its variable cost of $54 per unit. 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

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23) The Parts Division of Nydron Corporation makes Part Y6P, which it sells to outside companies for $17.00 per unit. According to the cost accounting system, the costs of making one unit of Part Y6P consist of $7.00 for direct materials, $3.00 for direct labor, $4.50 for variable manufacturing overhead, and $1.20 for fixed manufacturing overhead. The Parts Division has enough idle capacity to make 1,000 units of Part Y6P each month. The Assembly Division of  Nydron Corporation can use Part Y6P in one of its products. At present, the Assembly Division is purchasing an equivalent part from an outside supplier for $16.85 per un unit. it. The Assembly Division needs 2,000 units of the part p art each month. It has been sugg suggested ested that the Assembly Division buy Part Y6P from the Parts Division instead of buying the equivalent part from the outside supplier. The transfer price for this transaction would lie within what limits? A) equal to or greater than $15.75 and less than or equal to $16.85 B) equal to or greater than $15.70 and less than or equal to $17.00 C) equal to or greater than $14.50 and less than or equal to $17.00 D) equal to or greater than $14.50 and less than or equal to $16.85

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Answer: A Explanation: Lost outside sales = 1,000 units Variable cost per unit = $7.00 per unit + $3.00 per unit + $4.50 per unit = $14.50 per unit Contribution margin per unit = $17.00 per unit − $14.50 per unit unit = $2.50 per unit

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 co st per unit Transfer price > Variable cost per unit + (Total contribution margin on lost sales ÷ Number of units transferred) Transfer price > $14.50 per unit + [($2.50 per unit × 1,000 units) ÷ 2,000 units] = $15.75 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 < $16.85 per unit

$15.75 per unit < Transfer price < $16.85 per unit Difficulty: 3 Hard 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

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24) Koppenhaver Products, Inc., has a Relay Division that manufactures and sells a number of  products, including a standard relay that could be used by another division in the company, the Electronics Division, in one of its products. Data concerning that relay appear below:

Capacity in units Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

86,000 $ 63 $ 41 $ 10

The Electronics Division is currently purchasing 15,000 of these relays per year from an overseas supplier at a cost of $57 per relay. Assume that the Valve Division is selling all of the valves it can produce to outside customers. Also assume that $10 in variable expenses can be avoided on transfers within the company due to reduced shipping and selling costs. c osts. What should be the minimum acceptable transfer price p rice for the valves from the standpoint of the Valve Division? A) $57 per unit B) C) $41 $53 per per unit unit D) $63 per unit

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

Selling price to outside customers Variable cost per unit

$ $

63 41

Unit contribution margin Reduction in outside unit sales Total contribution margin on lost sales

$ 15,000 22 $ 330,000

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 co ntribution margin on lost sales ÷ Number of units transferred) Transfer price > ($41 per unit − $10 per unit) + ($330,000 ÷ 15,000 units) = $31 per unit + $22  per unit = $53 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

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25) Division R of Harris Corporation has the capacity for making 40,000 wheel sets per year y ear and regularly sells 36,000 each year on the outside market. The regular selling p price rice on the outside market is $89 per wheel set, and an d the variable production cost per unit is $56. Division S of Harris Corporation currently buys 6,000 wheel sets (of the kind made by Division R) yearly from an outside supplier at a price of $85 per wheel set. If Division S were to buy the 6,000 wheel sets it needs annually from Division R at $83 per wheel set, the change in annual net operating income for the company as a whole, compared to what it is currently, would be: A) $108,000 B) $174,000 C) $162,000 D) $96,000 Answer: A Explanation: Available capacity capacity for outside sales = Capacity − Internal sales  sales   = 40,000 wheel sets − 6,000 wheel sets = 34,000 wheel sets  sets  Lost outside sales = Total outside demand − Available capacity for outside sales sales   = 36,000 wheel sets − 34,000 wheel sets = 2,000 wheel sets  sets  Amount paid by Division S for 6,000 wheel sets purchased $ 510,000 from outside supplier (6,000 wheel sets × $85 per wheel set) Less: Cost for Division R to produce 6,000 wheel wh eel sets × $56 per wheel set 336,000 Less: Lost profit for Division R to cut back sales to the outside (($89 per wheel set –  set –  $56 per wheel set) × 2,000 wheel sets) 66,000 Change in net annual operating income for the company as $ 108,000 a whole

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

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26) Tron Products, Inc., has a Pump P ump Division that manufactures and sells a number of products, including a standard pump that could be used by another division in the company, the Pool Products Division, in one of its products. Data concerning that pump appear below:

Capacity in units Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

81,000 $ 98 $ 51 $ 27

The Pool Products Division is currently purchasing 4,000 of these pumps per year from an overseas supplier at a cost of $94 per pump. Assume that the Valve Division is selling all of the valves it can produce to outside customers. Also assume that $3 in variable expenses can be avoided on transfers within the company due to reduced shipping and selling costs. Does there exist a transfer price that would make both the Valve and Pump Division financially better off than if the Pump Division were to continue  buying its valves from the outside supplier? A) The the answer cannottransfer be determined from information hasbe been provided. B) No, minimum price that the the selling division that should willing to accept exceeds the maximum transfer price that the buying division would accept. C) 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. D) 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 would accept.

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

Selling price to outside customers Variable cost per unit

$ $

Unit contribution margin Reduction in outside unit sales Total contribution margin on lost sales

$

98 51

47 4,000 $ 188,000

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 co ntribution margin on lost sales ÷ Number of units transferred) Transfer price > ($51 per unit u nit − $3 per unit) + ($188,000 ÷ 4,000 units) = $48 per unit + $47 per unit = $95 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 < $94 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 max imum price that the buying division is willing to pay. 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

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27) Rohrer Products, Inc., has a Motor Division that manufactures and sells a number of  products, including a standard motor that could be used by another division in the company, the Automotive Division, in one of its products. Data concerning that motor appear below:

Capacity in units Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

56,000 $ 95 $ 41 $ 24

The Automotive Division is currently purchasing 10,000 of o f these motors per year from an overseas supplier at a cost of $88 per motor. Assume that the Motor Division has enough idle capacity to handle all of the Automotive Division's needs. What should be the minimum acceptable transfer price for the motors from the standpoint of the Motor Division? A) $65 per unit B) $88 per unit C) D) $41 $95 per per unit unit Answer: C Explanation: From the perspective of the selling division, profits would increase as a result 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 > $41 per unit + ($0 ÷ 10,000 units) = $41 per unit + $0 per unit = $41 per unit 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

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28) Ricardo 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 Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

87,000 $ 57 $ 30 $ 19

The Automotive Division of Ricardo Products, Inc needs 10,000 special heavy-duty motors per year. The Motor Division's variable cost to manufacture and ship this special motor would be $35 per unit. Because these the se 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 87,000 units per year to 69,000 6 9,000 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) $486,000 B) C) $874,800 $1,026,000 D) $270,000 Answer: A Explanation: To produce the the 10,000 special motors, the Motor Division Division will have to give up sales of 18,000 of the regular motors to outside customers.

Selling price to outside customers Variable cost per unit Unit contribution margin Reduction in outside unit sales Total contribution margin on lost sales

$ $ $

57 30 27 18,000 $ 486,000

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

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29) Delemos Products, Inc., has a Transmitter Division that manufactures and sells a number of  products, including a standard transmitter. Data concerning that transmitter appear below:

Capacity in units Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

83,000 $ 98 $ 60 $ 24

The Remote Devices Division of Delemos Products, Inc needs 6,000 special heavy-duty transmitters per year. The Transmitter Division's variable cost to manufacture and ship this special transmitter would be $66 per unit. Because these special transmitters require more manufacturing resources than the standard transmitter, the Transmitter Division would have to reduce its production and sales of standard transmitters to outside customers from 83,000 units  per year to 76,400 units per year. From the standpoint of the Transmitter Division, what is the minimal acceptable acceptab le transfer price for the special transmitters for the Remote Devices Division? A) $90.00 per per unit unit B) $98.00 C) $104.00 per unit D) $107.80 per unit

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Answer: D Explanation: To produce the the 6,000 special transmitters, the Transmitter Division will have to give up sales of 6,600 of the regular transmitters to outside customers.

Selling price to outside customers Variable cost per unit Unit contribution margin Reduction in outside unit sales Total contribution margin on lost sales

$ $ $

98 60 38 6,600 $ 250,800

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 co ntribution margin on lost sales ÷ Number of units transferred) Transfer price > $66.00 per unit + ($250,800 ÷ 6,000 units) = $66.00 per unit + $41.80 per unit = $107.80 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

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30) Fois Company has two divisions, Division X and Division Y. Division X has a production produ ction capacity of 5,000 units of a particular part per month. Division X sells 4,4 4,400 00 units of the part each month to outside customers at a contribution margin of $56 per unit. Division Y would like to buy 800 units of the part each month from Division X. In compu computing ting the lowest acceptable transfer price from the perspective of the selling division, the lost contribution margin per unit  portion of the transfer price computation would be: A) $56.00 per unit B) $30.00 per unit C) $14.00 per unit D) $25.00 per unit Answer: C Explanation: Available capacity for outside sales = Capacity − Internal sales  sales  = 5,000 units − 800 units = 4,200 units  units  Lost outside sales = Total outside demand − Available capacity for outside sales sales   = 4,400 units − 4,200 units = 200 units  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 co st per unit Transfer price > Variable cost per unit + (Total contribution co ntribution margin on lost sales ÷ Number of units transferred) Total contribution margin on lost sales = 200 units u nits × $56 per unit = $11,20 $11,200 0 Total contribution margin on lost sales ÷ Number of units transferred = $11,200 $11,20 0 ÷ 800 units = $14.00 per unit Difficulty: 3 Hard 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

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31) Wamsley Products, Inc., has a Transmitter Division that manufactures and an d sells a number of  products, including a standard transmitter that could be used by another division in the company, the Remote Devices Division, in one of its products. Data concerning that transmitter appear  below:

Capacity in units Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

60,000 $ 64 $ 27 $ 17

The Remote Devices Division is currently purchasing 8,000 of these transmitters per year from an overseas supplier at a cost of $61 $ 61 per transmitter. Assume that the Transmitter Division is selling all of the transmitters it can produce to outside customers. What should be the minimum acceptable transfer price for the transmitters from the standpoint of the Transmitter Division? A) $44 per unit B) C) $27 $64 per per unit unit D) $61 per unit

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

Selling price to outside customers Variable cost per unit

$ $

Unit contribution margin Reduction in outside unit sales Total contribution margin on lost sales

$

64 27

37 8,000 $ 296,000

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 co ntribution margin on lost sales ÷ Number of units transferred) Transfer price > $27 per unit + ($296,000 ÷ 8,000 units) = $27 per unit + $37 per unit un it = $64 per unit 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

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32) Leneau Products, Inc., has a Connector Division that manufactures and sells a number of  products, including a standard connector that could be used by another division in the company, the Transmission Division, in one of its products. Data concerning that connector appear below:

Capacity in units Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

65,000 $ 56 $ 25 $ 23

The Transmission Division is currently purchasing 12,000 of these connectors connec tors per year from an overseas supplier at a cost of $52 per connector. Assume that the Valve Division is selling all of the valves it can produce to outside customers. Also assume that $5 in variable expenses can be avoided on transfers within the company due to reduced shipping and selling costs. Does there exist a transfer price that would make both the Valve and Pump Division financially better off than if the Pump Division were to continue  buying its valves from the outside supplier? A) Yes, the minimum transfer price that the selling division should be willing to accept is less than the maximum transfer price that the buying buy ing division would accept. Both d divisions ivisions would be financially better off if the transfers were to take place. B) Yes, both divisions are always better off regardless of whether the th e selling division has enough idle capacity to handle all of the buying division's needs. C) No, the selling division's price to outside customers is higher than the price that the buying division has to pay its outside supplier. D) The answer cannot be determined from the information that has been provided.

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

Selling price to outside customers Variable cost per unit

$ $

Unit contribution margin Reduction in outside unit sales Total contribution margin on lost sales

$

56 25

31 12,000 $ 372,000

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 co ntribution margin on lost sales ÷ Number of units transferred) Transfer price > ($25 per unit − $5 per unit) + ($372,000 ÷ 12,000 units) = $20 per unit + $31  per unit = $51 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 < $52 per unit

Combining the two requirements, the range of acceptable transfer prices is: $51 per unit < Transfer price < $52 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

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33) Wigelsworth Products, Inc., has a Sensor Division that manufactures and a nd sells a number of  products, including a standard sensor. Data concerning that sensor appear below:

Capacity in units Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

89,000 $ 67 $ 30 $ 28

The Safety Products Division of Wigelsworth Products, Inc needs 6,000 special heavy-duty sensors per year. The Sensor Division's variable cost to manufacture and ship this special sensor would be $32 per unit. un it. Because these special sensors require more manufacturing resources than the standard sensor, the Sensor Division would have hav e to reduce its production and sales of standard sensors to outside customers from 89,000 units per year to 79,400 units per year. From the standpoint of the Sensor Division, what is the minimal acceptable transfer price for the special sensors for the Safety Products Division? A) $60.00 per unit B) $67.00 per unit C) $69.00 per unit D) $91.20 per unit

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Answer: D Explanation: To produce the the 6,000 special sensors, the Sensor Division will have to give up sales of 9,600 of the regular sensors to outside ou tside customers.

Selling price to outside customers Variable cost per unit Unit contribution margin Reduction in outside unit sales Total contribution margin on lost sales

$ $ $

67 30 37 9,600 $ 355,200

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 co ntribution margin on lost sales ÷ Number of units transferred) Transfer price > $32.00 per unit + ($355,200 ÷ 6,000 units) = $32.00 per unit + $59.20 per unit = $91.20 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

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34) Meers Products, Inc., has a Detector Division that manufactures and sells a number of  products, including a standard detector that could be used by another division in the company, the Commercial Security Division, in one of its products. Data concerning that detector appea appearr  below:

Capacity in units Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

43,000 $ 98 $ 39 $ 40

The Commercial Security Division is currently purchasing 7,000 of o f these detectors per year from an overseas supplier at a cost of $93 $9 3 per detector. Assume that the Valve Division is selling all of the valves it can produce to outside customers. From the standpoint of the Valve Division, what is the lost contribution margin if the valves are transferred internally rather than sold to outside customers? A) $133,000 B) $469,000 C) $2,537,000 D) $413,000 Answer: D Explanation: The total contribution margin on lost sales is computed as follows:

Selling price to outside customers Variable cost per unit Unit contribution margin Reduction in outside unit sales Total contribution margin on lost sales

$ $ $

98 39 59 7,000 $ 413,000

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

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35) Cichy Products, Inc., has a Valve Division that manufactures and sells a numbe numberr of products, including a standard valve that could be used by another division in the company, the Pump Division, in one of its products. Data concerning that valve appear below:

Capacity in units Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

80,000 $ 90 $ 37 $ 32

The Pump Division is currently purchasing 5,000 of these valves per year from an overseas supplier at a cost of $85 per valve. What is the maximum price that the Pump Division should be willing to pay for valves transferred from the Valve Division? A) $37 per unit B) $85 per unit C) $32 per unit D) $69 per unit Answer: B Explanation: From the the perspective of the purchasing division, the transfer transfer is financially attractive if and only if: Transfer price < Cost of buying from outside supplier Transfer price < $85 per unit 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

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36) Stokan Products, Inc., has a Antennae Division that manufactures and sells a number of  products, including a standard antennae that could be used by another division in the company, the Aircraft Products Division, in one of its products. Data concerning conc erning that antennae appear  below:

Capacityprice in units Selling to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

$ 86,000 63 $ 22 $ 18

The Aircraft Products Division is currently purchasing 5,000 of these antennaes anten naes per year from an overseas supplier at a cost of $57 per antennae. What is the maximum price that the Aircraft Products Division should be b e willing to pay for antennaes transferred from the Antennae Division? A) $22 per unit B) $57 per unit C) $18 per unit D) $40 per unit Answer: B Explanation: From the the perspective of the purchasing division, the transfer transfer is financially attractive if and only if: Transfer price < Cost of buying from outside supplier Transfer price < $57 per unit 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

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37) Stokan Products, Inc., has a Antennae Division that manufactures and sells a number of  products, including a standard antennae that could be used by another division in the company, the Aircraft Products Division, in one of its products. Data concerning conc erning that antennae appear  below:

Capacity in units Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

$ 86,000 63 $ 22 $ 18

The Aircraft Products Division is currently purchasing 5,000 of these antennaes anten naes per year from an overseas supplier at a cost of $57 per antennae. Assume that the Antennae Division is selling all of the antennaes it can produce to outside customers. What should be the minimum acceptable transfer price for the antennaes from the standpoint of the Antennae Division? A) $40 per unit B) $63 per unit C) $57 per unit D) $22 per unit

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

Selling price to outside customers Variable cost per unit

$ $

Unit contribution margin Reduction in outside unit sales Total contribution margin on lost sales

$

63 22

41 5,000 $ 205,000

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 > $22 per unit + ($205,000 ÷ 5,000 units) = $22 per unit + $41 per unit un it = $63 per unit 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

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38) Stokan Products, Inc., has a Antennae Division that manufactures and sells a number of  products, including a standard antennae that could be used by another division in the company, the Aircraft Products Division, in one of its products. Data concerning conc erning that antennae appear  below:

Capacity in units Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

$ 86,000 63 $ 22 $ 18

The Aircraft Products Division is currently purchasing 5,000 of these antennaes anten naes per year from an overseas supplier at a cost of $57 per antennae. Assume that the Valve Division is selling all of the valves it can produce to outside customers. Also assume that $7 in variable expenses can be avoided on transfers within the company due to reduced shipping and selling costs. What should be the minimum acceptable transfer price for the valves from the standpoint of the Valve Division? A) $33 per unit B) $63 per unit C) $56 per unit D) $57 per unit

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

Selling price to outside customers Variable cost per unit

$ $

Unit contribution margin Reduction in outside unit sales Total contribution margin on lost sales

$

63 22

41 5,000 $ 205,000

From the perspective of the selling division, profits p rofits would increase as a result of the transfer if and only if: Transfer price > Variable cost per unit + (Total contribution co ntribution margin on lost sales ÷ Number of units transferred) Transfer price > ($22 per unit − $7 per unit) + ($205,000 ÷ 5,0 00 units) = $15 per unit + $41 per unit = $56 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

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39) Division S of Kracker Company makes a part that it sells to other companies. Data on that  part appear below:

Selling price on the intermediate market Variable costs per unit

$ $

30 per unit 22 per unit

Fixed costs unit (based on capacity) Capacity in per units

$ 50,000 7 units per unit

Division B, another division of Kracker Company, presently is purchasing 10,000 units of a similar product each period from an outside supplier for $28 per unit, but would like to begin  purchasing from Division S. Suppose that Division S has ample idle capacity to handle all of Division B's needs without any increase in fixed costs or cutting into sales to outside o utside customers. If Division S refuses to accept a transfer price of $28 or less and Division B continues to buy from the outside supplier, the company as a whole will: A) gain $20,000 in potential profit. B) lose $60,000 in potential profit. C) lose $70,000 in potential profit. D) lose $20,000 in potential profit. Answer: B Explanation: Transfer internally Lost contribution margin on sales to outside customers Variable cost of producing internally ($22 per unit × 10,000 units) Cost of purchasing externally ($28 per unit × 10,000 units)

$

Purchase from outside supplier

0 220,000

$ 220,000

$ 280,000 $ 280,000

The cost would be higher by $60,000 if the units are purchased from an outside supplier rather than produced internally and transferred. 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 48 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 

 

40) Division S of Kracker Company makes a part that it sells to other companies. Data on that  part appear below:

Selling price on the intermediate market Variable costs per unit

$ $

30 per unit 22 per unit

Fixed costs unit (based on capacity) Capacity in per units

$ 50,000 7 units per unit

Division B, another division of Kracker Company, presently is purchasing 10,000 units of a similar product each period from an outside supplier for $28 per unit, but would like to begin  purchasing from Division S. Suppose that Division S can sell all that it can produce to outside customers. If Division S sells to Division B at a price of $28 per unit, the company as a whole will be: A) worse off by $80,000 each period. B) worse off by $70,000 each period. C) better off by $20,000 each period. D) worse off by $20,000 each period. Answer: D Explanation: Transfer internally Lost contribution margin on sales to outside customers [($30 per unit –  unit –  $22  $22 per unit) × 10,000 units] Variable cost of producing internally ($22 per unit × 10,000 units) Cost of purchasing externally ($28 per unit × 10,000 units)

$

Purchase from outside supplier

80,000

220,000

$ 300,000

$ 280,000 $ 280,000

In this situation, the cost of making the product p roduct internally is $20,000 higher than the cost of  purchasing it externally. 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 49 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 

 

41) Bacot Products, Inc., has a Valve Division that manufactures and sells a number of products, including a standard valve that could be used by another division in the company, the Pump Division, in one of its products. Data concerning that valve appear below:

Capacity in units Selling outside Variableprice costto per unit customers Fixed cost per unit (based on capacity)

60,000 $ $ $

53 28 17

The Pump Division is currently purchasing 8,000 of these valves per year from an overseas supplier at a cost of $47 per p er valve. What is the maximum price that the Pump Division should be willing to pay for valves transferred from the Valve Division? A) $45 per unit B) $28 per unit C) $47 per unit D) $17 per unit Answer: C Explanation: From the perspective of the purchasing division, the transfer is is financially attractive if and only if: Transfer price < Cost of buying from outside supplier Transfer price < $47 per unit 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

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42) Bacot Products, Inc., has a Valve Division that manufactures and sells a number of products, including a standard valve that could be used by another division in the company, the Pump Division, in one of its products. Data concerning that valve appear below:

Capacity in units Selling outside Variableprice costto per unit customers Fixed cost per unit (based on capacity)

60,000 $ $ $

53 28 17

The Pump Division is currently purchasing 8,000 of these valves per year from an ov overseas erseas supplier at a cost of $47 per p er valve. Assume that the Valve Division has enough idle capacity to handle all of the Pump Division's needs. What should be the minimum acceptable transfer price for the valves from the standpoint of the Valve Division? A) $45 per unit B) $28 per unit C) $47 per unit D) $53 per unit Answer: B Explanation: From the perspective of the selling division, profits would increase as a result result of the transfer if and only if: Transfer price > Variable cost per unit + (Total contribution co ntribution margin on lost sales ÷ Number of units transferred) Transfer price > $28 per unit + ($0 ÷ 8,000 units) = $28 per u unit nit + $0 per unit = $28 per unit 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

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43) Bacot Products, Inc., has a Valve Division that manufactures and sells a number of products, including a standard valve that could be used by another division in the company, the Pump Division, in one of its products. Data concerning that valve appear below:

Capacity in units Selling outside Variableprice costto per unit customers Fixed cost per unit (based on capacity)

60,000 $ $ $

53 28 17

The Pump Division is currently purchasing 8,000 of these valves per year from an overseas supplier at a cost of $47 per valve. Assume that the Valve Division is selling all of the valves it can produce to outside customers. What should be the minimum acceptable transfer t ransfer price for the valves from the standpoint of the Valve Division? A) $47 per unit B) $28 per unit C) $45 per unit D) $53 per unit

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

Selling price to outside customers Variable cost per unit

$ $

Unit contribution margin Reduction in outside unit sales Total contribution margin on lost sales

$

53 28

25 8,000 $ 200,000

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 > $28 per unit + ($200,000 ÷ 8,000 units) = $28 per unit + $25 per unit un it = $53 per unit 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

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44) Brull Products, Inc., has a Sensor Division that manufactures and sells a number o off products, including a standard sensor. Data concerning that sensor appear below:

Capacity in units Selling price to outside customers

56,000 $ 75

Variable Fixed costcost perper unitunit (based on capacity)

$ $

52 17

The Safety Products Division of Brull Products, Inc needs 6,000 special heavy-duty sensors per year. The Sensor Division's variable cost to manufacture and ship this special sensor would be $60 per unit. Because these the se special sensors require more manufacturing resources than the standard sensor, the Sensor Division would have to reduce its production and sales of standard sensors to outside customers from 56,000 units per year to 46,400 4 6,400 units per year. What is the total contribution margin on sales to outside o utside customers that the Sensor Division would give up if it were to make the special sensors for the Safety Produ Products cts Division? A) $720,000 B) $353,280 C) $220,800 D) $138,000 Answer: C Explanation: To produce the the 6,000 special sensors, the Sensor Division will have to give up sales of 9,600 of the regular sensors to outside ou tside customers.

Selling price to outside customers Variable cost per unit Unit contribution margin Reduction in outside unit sales Total contribution margin on lost sales

$ $ $

75 52 23 9,600 $ 220,800

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

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45) Brull Products, Inc., has a Sensor Division that manufactures and sells a number of p products, roducts, including a standard sensor. Data concerning that sensor appear below:

Capacity in units Selling price to outside customers

56,000 $ 75

Variable Fixed costcost perper unitunit (based on capacity)

$ $

52 17

The Safety Products Division of Brull Products, Inc needs 6,000 special heavy-duty sensors per year. The Sensor Division's variable cost to manufacture and ship this special sensor would be $60 per unit. Because these the se special sensors require more manufacturing resources than the standard sensor, the Sensor Division would have to reduce its production and sales of standard sensors to outside customers from 56,000 units per year to 46,400 4 6,400 units per year. From the standpoint of the Sensor Division, what is the minimal acceptable transfer price for the special sensors for the Safety Products Division? A) $75.00 per unit B) $77.00 per unit C) $83.00 per unit D) $96.80 per unit

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Answer: D Explanation: To produce the the 6,000 special sensors, the Sensor Division will have to give up sales of 9,600 of the regular sensors to outside ou tside customers.

Selling price to outside customers

$

Variable cost per unit Unit contribution margin Reduction in outside unit sales Total contribution margin on lost sales

$ $

75

52 23 9,600 $ 220,800

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 co ntribution margin on lost sales ÷ Number of units transferred) Transfer price > $60.00 per unit + ($220,800 ÷ 6,000 units) = $60.00 per unit + $36.80 per unit = $96.80 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

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46) Germano Products, Inc., has a Pump Division that manufactures and sells a number numbe r of  products, including a standard pump that could be used by another division in the company, the Pool Products Division, in one of its products. Data concerning that pump appear below:

Capacity in units Selling outside Variableprice costto per unit customers Fixed cost per unit (based on capacity)

65,000 $ $ $

98 36 44

The Pool Products Division is currently purchasing 10,000 of these pumps per year from an overseas supplier at a cost of $94 per pump. Assume that the Pump Division has enough idle capacity to handle all of the Pool Products Division's needs. Does there exist a transfer price that would make both the Pump and Pool Products Division financially better off than if the Pool Products P roducts Division were to continue  buying its pumps 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 would accept. C) The answer cannot be determined from the information that has been provided. D) No, the selling division's price to outside customers is higher than the price that the buying division has to pay its outside supplier.

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Answer: B Explanation: 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 co ntribution margin on lost sales ÷ Number of units transferred) Transfer price > $36 per unit + ($0 ÷ 10,000 units) = $36 per unit + $0 per unit = $36 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 < $94 per unit Both divisions would be financially better off making the transfer at any transfer price between $36 per unit and $94 per unit. 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

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47) Germano Products, Inc., has a Pump Division that manufactures and sells a number numbe r of  products, including a standard pump that could be used by another division in the company, the Pool Products Division, in one of its products. Data concerning that pump appear below:

Capacity in units Selling outside Variableprice costto per unit customers Fixed cost per unit (based on capacity)

65,000 $ $ $

98 36 44

The Pool Products Division is currently purchasing 10,000 of these pumps per year from an overseas supplier at a cost of $94 per pump. Assume that the Pump Division is selling all of the pumps p umps it can produce to outside customers. Does there exist a transfer price that would make both the Pump and Pool Products Division financially better off than if the Pool Products Division were to continue buying its pumps from the outside supplier? A) Yes, both divisions are always better off regardless of whether the th e 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.

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

Selling price to outside customers Variable cost per unit

$ $

Unit contribution margin Reduction in outside unit sales Total contribution margin on lost sales

$

98 36

62 10,000 $ 620,000

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 > $36 per unit + ($620,000 ÷ 10,000 units) = $36 per unit + $62 per u unit nit = $98 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 < $94 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 ma ximum 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

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48) Division A makes a part with the following characteristics:

Production capacity in units Selling price to outside customers Variable cost per unit

15,000 units $ 25 $ 18

Total fixed costs

$ 60,000

Division B, another division of the same company, company , would like to purchase 5, 5,000 000 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. Suppose that Division A has ample idle capacity to handle all of Division B's needs without any increase in fixed costs and without cutting into sales to outside customers. If Division A refuses to accept the $24 price p rice internally and Division B continues to buy from the 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. Answer: A Explanation: Because there is ample excess capacity, there is no opportunity cost. Instead of incurring a cost of $18 per unit if the transfer were made internally, the company would have to incur a cost of $24 per unit to purchase from an outside supplier. Therefore, the company would be worse off by $30,000 per period = ($24 per unit − $18  per unit) × 5,000 units per period 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

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49) Division A makes a part with the following characteristics:

Production capacity in units Selling price to outside customers Variable cost per unit

15,000 units $ 25 $ 18

Total fixed costs

$ 60,000

Division B, another division of the same company, company , would like to purchase 5, 5,000 000 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. Suppose that Division A is operating at capacity and can sell all of its output to outside customers at its usual selling price. If Division A agrees to sell the parts to Division B at $24 per unit, 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. D) There will be no change in the profits of the company as a whole. Answer: C Explanation: Instead of being able to sell the units for $25 per unit on the outside market, the company would save $24 per unit transferring them internally. The net effect is a reduction of $5,000 per period = ($25 per unit − $24 per unit) × 5,000 units per  period 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

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50) Zeilinger Products, Inc., has a Screen Division that manufactures and sells a number o off  products, including a standard screen that could be used by another division in the company, the Home Security Division, in one of its products. Data concerning that screen appear below:

Capacity in units Selling outside Variableprice costto per unit customers Fixed cost per unit (based on capacity)

40,000 $ $ $

65 28 26

The Home Security Division is currently purchasing 8,000 of these screens per year from an overseas supplier at a cost of $58 per screen. What is the maximum price that the Home Security Division should be willing to pay for screens transferred from the Screen Division? A) $58 per unit B) $26 per unit C) $28 per unit D) $54 per unit Answer: A Explanation: From the perspective of the purchasing division, the transfer is is financially attractive if and only if: Transfer price < Cost of buying from outside supplier Transfer price < $58 per unit 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

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51) Zeilinger Products, Inc., has a Screen Division that manufactures and sells a number of  products, including a standard screen that could be used by another division in the company, the Home Security Division, in one of its products. Data concerning that screen appear below:

Capacity in units

40,000

Selling outside Variableprice costto per unit customers Fixed cost per unit (based on capacity)

$ $ $

65 28 26

The Home Security Division is currently purchasing 8,000 of these screens per year from an overseas supplier at a cost of $58 per screen. Assume that the Valve Division is selling all of the valves it can produce to outside customers. From the standpoint of the Valve Division, what is the lost contribution margin if the valves are transferred internally rather than sold to outside customers? A) $88,000 B) $392,000 C) $1,480,000 D) $296,000 Answer: D Explanation: The total contribution margin on lost sales is computed as follows:

Selling price to outside customers Variable cost per unit Unit contribution margin Reduction in outside unit sales Total contribution margin on lost sales

$ $ $

65 28 37 8,000 $ 296,000

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

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52) Royal Products, Inc., has a Connector Division that manufactures and sells a numbe numberr of  products, including a standard connector that could be used by another division in the company, the Transmission Division, in one of its products. Data concerning that connector appear below:

Capacity in units Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

66,000 $ $ $

69 21 35

The Transmission Division is currently purchasing 6,000 of these connectors per year from an overseas supplier at a cost of $65 per connector. What is the maximum price that the Transmission Division should be willing to pay for connectors transferred from the Connector Division? A) $35 per unit B) $65 per unit C) $56 per unit D) $21 per unit Answer: B Explanation: From the the perspective of the purchasing division, the transfer is financially financially attractive if and only if: Transfer price < Cost of buying from outside supplier Transfer price < $65 per unit 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

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53) Royal Products, Inc., has a Connector Division that manufactures and sells a numbe numberr of  products, including a standard connector that could be used by another division in the company, the Transmission Division, in one of its products. Data concerning that connector appear below:

Capacity in units Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

66,000 $ $ $

69 21 35

The Transmission Division is currently purchasing 6,000 of these connectors per year from an overseas supplier at a cost of $65 per connector.  Assume that the Connector Division has enough enoug h idle capacity to handle all of the Transmission Division's needs. What should be the minimum acceptable transfer price for the connectors from the standpoint of the Connector Division? A) $21 per unit B) $56 per unit C) $69 per unit D) $65 per unit Answer: A Explanation: From the perspective of the selling division, profits would increase as a result result of the transfer if and only if: Transfer price > Variable cost per unit + (Total contribution co ntribution margin on lost sales ÷ Number of units transferred) Transfer price > $21 per unit + ($0 ÷ 6,000 units) = $21 per u unit nit + $0 per unit = $21 per unit 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

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54) Royal Products, Inc., has a Connector Division that manufactures and sells a numbe numberr of  products, including a standard connector that could be used by another division in the company, the Transmission Division, in one of its products. Data concerning that connector appear below:

Capacity in units Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

66,000 $ $ $

69 21 35

The Transmission Division is currently purchasing 6,000 of these connectors per year from an overseas supplier at a cost of $65 per connector. Assume that the Connector Division is selling all of the connectors conn ectors it can produce to outside o utside customers. What should be the minimum acceptable transfer price for the connectors from the standpoint of the Connector Division? A) $56 per unit B) $65 per unit C) $69 per unit D) $21 per unit

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

Selling price to outside customers Variable cost per unit

$ $

Unit contribution margin Reduction in outside unit sales Total contribution margin on lost sales

$

69 21

48 6,000 $ 288,000

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 co ntribution margin on lost sales ÷ Number of units transferred) Transfer price > $21 per unit + ($288,000 ÷ 6,000 units) = $21 per unit + $48 per unit un it = $69 per unit 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

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55) Fregozo Products, Inc., has a Connector Division that manufactures and sells a number of  products, including a standard connector that could be used by another division in the company, the Transmission Division, in one of its products. Data concerning that connector appear below:

Capacity in units Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

58,000 $ $ $

54 20 21

The Transmission Division is currently purchasing 8,000 of these connectors per year from an overseas supplier at a cost of $45 per connector. Assume that the Connector Division has enough idle capacity to handle all of the Transmission Division's needs. What should be the minimum acceptable transfer price for the connectors from the standpoint of the Connector Division? A) $54 per unit B) $20 per unit C) $41 per unit D) $45 per unit Answer: B Explanation: From the perspective of the selling division, profits would increase as a result result of the transfer if and only if: Transfer price > Variable cost per unit + (Total contribution co ntribution margin on lost sales ÷ Number of units transferred) Transfer price > $20 per unit + ($0 ÷ 8,000 units) = $20 per u unit nit + $0 per unit = $20 per unit 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

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56) Fregozo Products, Inc., has a Connector Division that manufactures and sells a number of  products, including a standard connector that could be used by another division in the company, the Transmission Division, in one of its products. Data concerning that connector appear below:

Capacity in units Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

58,000 $ $ $

54 20 21

The Transmission Division is currently purchasing 8,000 of these connectors per year from an overseas supplier at a cost of $45 per connector. Assume that the Connector Division is selling all of the connectors it can produce to outside customers. What should be the minimum acceptable transfer price for the connectors from the standpoint of the Connector Division? A) $54 per unit B) $45 per unit C) $41 per unit D) $20 per unit

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

Selling price to outside customers Variable cost per unit

$ $

Unit contribution margin Reduction in outside unit sales Total contribution margin on lost sales

$

54 20

34 8,000 $ 272,000

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 co ntribution margin on lost sales ÷ Number of units transferred) Transfer price > $20 per unit + ($272,000 ÷ 8,000 units) = $20 per unit + $34 per unit un it = $54 per unit 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

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57) Fregozo Products, Inc., has a Connector Division that manufactures and sells a number of  products, including a standard connector that could be used by another division in the company, the Transmission Division, in one of its products. Data concerning that connector appear below:

Capacity in units

58,000

Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

$ $ $

54 20 21

The Transmission Division is currently purchasing 8,000 of these connectors per year from an overseas supplier at a cost of $45 per connector. Assume that the Valve Division is selling all of the valves it can produce to outside customers. Also assume that $10 in variable expenses can be avoided on transfers within the company due to reduced shipping and selling costs. c osts. What should be the minimum acceptable transfer price for the valves from the standpoint of the Valve Division? A) $31 per unit B) $54 per unit C) $44 per unit D) $45 per unit

72

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

Selling price to outside customers Variable cost per unit

$ $

Unit contribution margin Reduction in outside unit sales Total contribution margin on lost sales

$

54 20

34 8,000 $ 272,000

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 co ntribution margin on lost sales ÷ Number of units transferred) Transfer price > ($20 per unit − $10 $1 0 per unit) + ($272,000 ÷ 8,000 units) = $10 per unit + $34  per unit = $44 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

73

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58) Division A of Tripper Company produces a part that it sells to other companies. Sales and cost data for the part follow:

Capacity in units Selling price per unit

60,000 units $ 40 per unit

Variable costs per unit Fixed costs per unit at capacity

$ $

28 per unit 9 per unit

Division B, another division of Tripper Company, would like to buy this part from Division A. Division B is presently purchasing the part from an outside source at $38 per unit. If Division A sells to Division B, $1 in variable costs can be avoided. Assume that Division A is presently operating at capacity. According Ac cording to the formula in the text, what is the lowest acceptable transfer price from the viewpoint v iewpoint of the selling division? A) $37 per unit B) $39 per unit C) $36 per unit D) $38 per unit Answer: B Explanation: From the perspective of the selling division, profits would increase as a result result of the transfer if and only if: Transfer price > Variable cost per unit + Opportunity cost per unit Transfer price > ($28 per unit − $1 per unit) + ($40 per unit − $28 per unit) = $27 per unit + $12  per unit = $39 per unit Difficulty: 3 Hard 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

74

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59) Division A of Tripper Company produces a part that it sells to other companies. Sales and cost data for the part follow:

Capacity in units Selling price per unit

60,000 units $ 40 per unit

Variable costs per unit Fixed costs per unit at capacity

$ $

28 per unit 9 per unit

Division B, another division of Tripper Company, would like to buy this part from Division A. Division B is presently purchasing the part from an outside source at $38 per unit. If Division A sells to Division B, $1 in variable costs can be avoided. Assume that Division A has ample idle capacity to handle all of Division B's needs without any increase in fixed costs and without cutting into outside sales. According to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division? A) $40 per unit B) $39 per unit C) $28 per unit D) $27 per unit Answer: D Explanation: From the perspective of the selling division, profits would increase as a result result of the transfer if and only if: Transfer price > Variable cost per unit + Opportunity cost co st per unit Transfer price > ($28 per unit − $1 per unit) + $0 per unit = $27 per unit  unit  Difficulty: 3 Hard 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

75

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60) Oberley Products, Inc., has a Receiver R eceiver 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 Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

$ $ $

47,000 67 33 19

The Industrial Products Division is currently purchasing 5,000 of these receivers per p er year from an overseas supplier at a cost of $58 $5 8 per receiver. What is the maximum price that the Industrial Products Division should be willing to pay for receivers transferred from the Receiver Division? A) $52 per unit B) $19 per unit C) $58 per unit D) $33 per unit Answer: C Explanation: From the perspective of the purchasing division, the transfer is is financially attractive if and only if: Transfer price < Cost of buying from outside supplier Transfer price < $58 per unit 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

76

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61) Oberley Products, Inc., has a Receiver R eceiver 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 Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

$ $ $

47,000 67 33 19

The Industrial Products Division is currently purchasing 5,000 of these receivers per p er year from an overseas supplier at a cost of $58 $5 8 per receiver. Assume that the Valve Division is selling all of the valves it can produce to outside customers. Also assume that $6 in variable expenses can c an be avoided on transfers within the company due to reduced shipping and selling costs. What should be the minimum acceptable transfer price for the valves from the standpoint of the Valve Division? A) $61 per unit B) $46 per unit C) $67 per unit D) $58 per unit

77

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

Selling price to outside customers Variable cost per unit

$ $

Unit contribution margin Reduction in outside unit sales Total contribution margin on lost sales

$

67 33

34 5,000 $ 170,000

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 > ($33 per unit − $6 per unit) + ($170,000 ÷ 5,000 units) = $27 per unit + $34 p per er unit = $61 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

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62) Division P of the Nyers Company makes a part that can either be sold to outside customers or transferred internally to Division Q for further processing. Annual data relating to this part are as follows:

Annual production capacity

80,000 units

Selling price of the item to outside customers Variable cost Average fixed cost

$ $ $

35 per unit 23 per unit 5 per unit

Division Q of the Nyers Company requires 15,000 15,00 0 units per year and is cu currently rrently paying an outside supplier $33 per unit. Consider each part below independently. If outside customers demand only 50,000 units per year, then according to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division? A) $35 per unit B) $33 per unit C) $28 per unit D) $23 per unit Answer: D Explanation: From the perspective of the selling division, profits would increase as a result result of the transfer if and only if: Transfer price > Variable cost per unit + Opportunity cost co st per unit However, there is no opportunity cost because ample idle capacity exists to satisfy Division Q's demand. Transfer price > $23 per unit + $0 = $23 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

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63) Division P of the Nyers Company makes a part that can either b bee sold to outside customers or transferred internally to Division Q for further processing. Annual data relating to this part are as follows:

Annual production capacity

80,000 units

Selling price of the item to outside customers Variable cost Average fixed cost

$ $ $

35 per unit 23 per unit 5 per unit

Division Q of the Nyers Company requires 15,000 15,00 0 units per year and is cu currently rrently paying an outside supplier $33 per unit. Consider each part below independently. If outside customers demand 80,000 units, then according to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division? A) $35 per unit B) $33 per unit C) $28 per unit D) $23 per unit

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Answer: A Explanation: Available capacity for outside outside sales = Capacity − Internal sales  sales  = 80,000 units − 15,000 units = 65,000 units Lost outside sales = Total outside demand − Available capacity for outside sales sales   = 80,000 units − 65,000 units = 15,000 units  units  Total contribution margin on lost sales = CM per unit × Lost outside sales = ($35 per unit − $23 per unit) × 15,000 15,000 units = $180,000

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 + Opportunity cost co st per unit Transfer price > Variable cost per unit + (Total contribution c ontribution margin on lost sales ÷ Number of units transferred) Transfer price > $23 per unit + ($180,000 ÷ 15,000 units) Transfer price > $23 per unit + $12 per unit = $35 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

81

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64) Division P of the Nyers Company makes a part that can either be sold to outside customers or transferred internally to Division Q for further processing. Annual data relating to this part are as follows:

Annual production capacity

80,000 units

Selling price of the item to outside customers Variable cost Average fixed cost

$ $ $

35 per unit 23 per unit 5 per unit

Division Q of the Nyers Company requires 15,000 15,00 0 units per year and is cu currently rrently paying an outside supplier $33 per unit. Consider each part below independently. If outside customers demand 80,000 units and if, by selling to Division Q, Division P could avoid $4 per unit in variable selling expense, then according to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division? A) $35 per unit B) $21 per unit C) $31 per unit D) $33 per unit

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Answer: C Explanation: Available capacity for outside outside sales = Capacity − Internal sales  sales  = 80,000 units − 15,000 units = 65,000 units  units  Lost outside sales = Total outside demand − Available ccapacity apacity for outside sales = 80,000 units − 65,000 units = 15,000 units  units  Total contribution margin on lost sales = CM per unit × Lost outside sales = ($35 per unit − $23 per unit) × 15,000 units = $180,000  $180,000 

From the perspective of the selling division, profits p rofits would increase as a result of the transfer if and only if: Transfer price > Variable cost per unit + Opportunity cost co st per unit Transfer price > Variable cost per unit + (Total contribution co ntribution margin on lost sales ÷ Number of units transferred) Transfer Tran sfer price > ($23 per unit − $4 per unit) + ($180,000 ÷ 15,000 units)   Transfer price > $19 per unit + $12 per unit = $31 per unit Difficulty: 3 Hard 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

83

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65) Division P of the Nyers Company makes a part that can either b bee sold to outside customers or transferred internally to Division Q for further processing. Annual data relating to this part are as follows:

Annual production capacity

80,000 units

Selling price of the item to outside customers Variable cost Average fixed cost

$ $ $

35 per unit 23 per unit 5 per unit

Division Q of the Nyers Company requires 15,000 15,00 0 units per year and is cu currently rrently paying an outside supplier $33 per unit. Consider each part below independently. If outside customers demand 70,000 units, then according to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division for each of the 15,000 units needed by Q? A) $33 per unit B) $27 per unit C) $28 per unit D) $29 per unit

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Answer: B Explanation: Available capacity capacity for outside sales = Capacity − Internal sales  sales   = 80,000 units − 15,000 units = 65,000 units  units  Lost outside sales = Total outside demand − Available capacity for outside sales sales   = 70,000 units − 65,000 units = 5,000 units  units  Total contribution margin on lost sales = CM per unit × Lost outside sales = ($35 per unit − $23 per unit) × 5,000 units = $60,000  $60,000 

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 + Opportunity cost per unit Transfer price > Variable cost per unit + (Total contribution co ntribution margin on lost sales ÷ Number of units transferred) Transfer price > $23 per unit + ($60,000 ÷ 15,000 units) Transfer price > $23 per unit + $4 per unit = $27 per unit Difficulty: 3 Hard 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

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66) Tommasino Products, Inc., has a Motor Division that manufactures and sells a number of  products, including a standard motor that could be used by another division in the company, the Automotive Division, in one of its products. Data concerning co ncerning that motor appear below:

Capacity in units

83,000

Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

$ $ $

74 22 28

The Automotive Division is currently purchasing 9,000 of these motors per year from an overseas supplier at a cost of $72 per motor. Assume that the Motor Division has enough idle capacity to handle all of the Automotive Division's needs. Does there exist a transfer price that would make both the Motor and Automotive Division financially better off than if the Automotive Division were to continue  buying its motors 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) No, the selling division's price to outside customers is higher than the price that the buying division has to pay its outside supplier. C) 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 would accept. D) The answer cannot be determined from the information that has been provided.

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Answer: C Explanation: From the perspective of the selling division, profits would increase as a result result of the transfer if and only if: Transfer price > Variable cost per unit + (Total contribution co ntribution margin on lost sales ÷ Number of units transferred) Transfer price > $22 per unit + ($0 ÷ 9,000 units) = $22 per u unit nit + $0 per unit uni t = $22 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 < $72 per unit Both divisions would be financially better off making the transfer at any transfer price between $22 per unit and $72 per unit. 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

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67) Tommasino Products, Inc., has a Motor Division that manufactures and sells a number of  products, including a standard motor that could be used by another division in the company, the Automotive Division, in one of its products. Data concerning that motor appear below:

Capacity in units

83,000

Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

$ $ $

74 22 28

The Automotive Division is currently purchasing 9,000 of these motors per year from an overseas supplier at a cost of $72 per motor. Assume that the Motor Division is selling all of the motors it can produce to outside customers. Does there exist a transfer price that would make both the Motor and Automotive Division financially better off than if the Automotive Division were to continue buying its motors from the outside supplier? A) The answer cannot be determined from the information that has been provided. B) 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. C) No, the minimum transfer price that the selling division should be willing to accept exceeds exce eds the maximum transfer price that the buying division should be willing to accept. D) 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.

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

Selling price to outside customers Variable cost per unit

$ $

Unit contribution margin Reduction in outside unit sales Total contribution margin on lost sales

$

74 22

52 9,000 $ 468,000

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 > $22 per unit + ($468,000 ÷ 9,000 units) = $22 per unit + $52 per unit un it = $74 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 < $72 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 max imum price that the buying division d ivision is willing to pay. Difficulty: 1 Easy Topic: Pricing LearningTransfer 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

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68) Fingado Products, Inc., has a Detector Division that manufactures and sells a number of  products, including a standard detector that could be used by another division in the company, the Commercial Security Division, in one of its products. Data concerning that detector appear  below:

Capacity in units Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

$ $ $

87,000 98 32 51

The Commercial Security Division is currently purchasing 6,000 of these detectors per year from an overseas supplier at a cost of $91 $9 1 per detector. What is the maximum price that the Commercial Security S ecurity Division should be willing to pay for detectors transferred from the Detector Division? A) $83 per unit B) $51 per unit C) $91 per unit D) $32 per unit Answer: C Explanation: From the perspective of the purchasing division, the transfer is is financially attractive if and only if: Transfer price < Cost of buying from outside supplier Transfer price < $91 per unit 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

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69) Fingado Products, Inc., has a Detector Division that manufactures and sells a number of  products, including a standard detector that could be used by another division in the company, the Commercial Security Division, in one of its products. Data concerning that detector appear  below:

Capacity in units Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

$ $ $

87,000 98 32 51

The Commercial Security Division is currently purchasing 6,000 of these detectors per year from an overseas supplier at a cost of $91 $9 1 per detector. Assume that the Detector Division is selling all of the detectors it can produce to outside customers. What should be the minimum acceptable transfer price for the detectors from the standpoint of the Detector Division? A) $32 per unit B) $98 per unit C) $91 per unit D) $83 per unit

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

Selling price to outside customers Variable cost per unit

$ $

Unit contribution margin Reduction in outside unit sales Total contribution margin on lost sales

$

98 32

66 6,000 $ 396,000

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 co ntribution margin on lost sales ÷ Number of units transferred) Transfer price > $32 per unit + ($396,000 ÷ 6,000 units) = $32 per unit + $66 per unit = $98 per unit 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

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70) Fingado Products, Inc., has a Detector Division that manufactures and sells a number of  products, including a standard detector that could be used by another division in the company, the Commercial Security Division, in one of its products. Data concerning that detector appear  below:

Capacity in units Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

$ $ $

87,000 98 32 51

The Commercial Security Division is currently purchasing 6,000 of these detectors per year from an overseas supplier at a cost of $91 $9 1 per detector. Assume that the Valve Division is selling all of the valves it can produce to outside customers. Also assume that $6 in variable expenses can be avoided on transfers within the company due to reduced shipping and selling costs. What should be the minimum acceptable transfer price for the valves from the standpoint of the Valve Division? A) $92 per unit B) $77 per unit C) $91 per unit D) $98 per unit

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

Selling price to outside customers Variable cost per unit

$ $

Unit contribution margin Reduction in outside unit sales Total contribution margin on lost sales

$

98 32

66 6,000 $ 396,000

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 > ($32 per unit − $6 per unit) + ($396,000 ÷ 6,000 units) = $26 per unit + $66 p per er unit = $92 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

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

Capacity in units Selling price to outside customers

86,000 $ 81

Variable cost per unit Fixed cost per unit (based on capacity)

$ $

43 18

The Automotive Division of Ebbs Products, Inc needs 9,000 special heavy-duty motors per year. The Motor Division's variable cost to manufacture and ship this special motor would be $46 per p er unit. Because these special motors require more manufacturing resources than the standard motor, the Motor Division would have to reduce redu ce its production and sales of standard motors to outside customers from 86,000 units per year to 72,500 72 ,500 units per year. What is the total contribution margin on sales to outside o utside customers that the Motor Division would give up if it were to make the special motors for the Automotive Division? A) $513,000 B) $342,000 C) $769,500 D) $1,093,500 Answer: A Explanation: To produce the the 9,000 special motors, the Motor Division will have to give up sales of 13,500 of the regular motors to outside customers.

Selling price to outside customers Variable cost per unit Unit contribution margin

$ $ $

81 43 38

Reduction in outside unit sales Total contribution margin on lost sales

13,500 $ 513,000

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

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72) Ebbs 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 Selling price to outside customers

86,000 $ 81

Variable cost per unit Fixed cost per unit (based on capacity)

$ $

43 18

The Automotive Division of Ebbs Products, Inc needs 9,000 special heavy-duty motors per year. The Motor Division's variable cost to manufacture and ship this special motor would be $46 per unit. Because these special motors require more manufacturing resources than the standard motor, the Motor Division would have to reduce redu ce its production and sales of standard motors tto o outside customers from 86,000 units per year to 72,500 72 ,500 units per year. From the standpoint of the Motor Division, what is the minimal acceptable transfer price for the special motors for the Automotive Division? A) $84.00 per unit B) $103.00 per unit C) $81.00 per unit D) $64.00 per unit

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Answer: B Explanation: To produce the the 9,000 special motors, the Motor Division Division will have to give up sales of 13,500 of the regular motors to outside customers.

Selling price to outside customers

$

Variable cost per unit Unit contribution margin Reduction in outside unit sales Total contribution margin on lost sales

$ $

81

43 38 13,500 $ 513,000

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 co ntribution margin on lost sales ÷ Number of units transferred) Transfer price > $46.00 per unit + ($513,000 ÷ 9,000 units) = $46.00 per unit + $57.00 per unit = $103.00 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

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73) Ganus Products, Inc., has a Relay Division that manufactures and sells a nu number mber of products, including a standard relay that could be used by another division in the company, the Electronics Division, in one of its products. Data concerning that relay appear below:

Capacity in units Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

50,000 $ $ $

62 20 29

The Electronics Division is currently purchasing 7,000 of these relays per year from an overseas supplier at a cost of $59 per p er relay. Assume that the Relay Division is selling all of the relays it can c an produce to outside customers. Does there exist a transfer price that would make both the Relay and Electronics Division financially better off than if the Electronics Division were to continue buying its relays from the outside supplier? A) 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. B) 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. C) 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. D) The answer cannot be determined from the information that has been provided.

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

Selling price to outside customers Variable cost per unit

$ $

Unit contribution margin Reduction in outside unit sales Total contribution margin on lost sales

$

62 20

42 7,000 $ 294,000

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 co ntribution margin on lost sales ÷ Number of units transferred) Transfer price > $20 per unit + ($294,000 ÷ 7,000 units) = $20 per unit + $42 per unit = $62 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 < $59 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 max imum 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

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74) Ganus Products, Inc., has a Relay Division that manufactures and sells a number of o f products, including a standard relay that could be used by another division in the company, the Electronics Division, in one of its products. Data concerning that relay appear below:

Capacity in units Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

50,000 $ $ $

62 20 29

The Electronics Division is currently purchasing 7,000 of these relays per year from an overseas supplier at a cost of $59 per relay. Assume that the Valve Division is selling all of the valves it can produce to outside customers. Also assume that $4 in variable expenses can be avoided on transfers within the company due to reduced shipping and selling costs. Does there exist a transfer price that would make both the Valve and Pump Division financially better off than if the Pump Division were to continue  buying its valves from the outside supplier? A) No, the selling division's price to outside customers is higher than tha n the price that the buying buy ing division has to pay its outside supplier. B) The answer cannot be determined from the information that has been provided. C) Yes, the minimum transfer price that the selling division should be willing to accept is less than the maximum transfer price that the buying buy ing division would accept. Both d divisions ivisions would be financially better off if the transfers were to take place. D) 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.

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

Selling price to outside customers Variable cost per unit

$ $

Unit contribution margin Reduction in outside unit sales Total contribution margin on lost sales

$

62 20

42 7,000 $ 294,000

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 > ($20 per unit − $4 per unit) + ($294,000 ÷ 7,000 units) = $16 per unit + $42 p per er unit = $58 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 < $59 per unit Combining the two requirements, the range of acceptable transfer prices is: $58 per unit < Transfer price < $59 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

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75) Two of the decentralized divisions of Gamberi Electronics Corporation are the Plastics Division and the Components Division. The Plastics Division sells molded parts to both the Components Division and to customers outside the corporation. corpo ration. Assume that the Plastics Division is currently operating at full capacity. Also assume that the Components Division wants to increase the number of parts it purchases from Plastics. In order to maintain its current level of profitability, the Plastics Division should not accept any transfer  price on these additional parts that is below the: A) variable cost of the additional parts. p arts. B) full (absorption) cost of the additional parts. C) variable cost of the additional parts plus the lost contribution margin on all units that could no longer be sold to customers outside the corporation. D) full (absorption) cost of the additional parts plus the lost contribution margin on all units that could no longer be sold to customers outside the corporation. Answer: C Explanation: The Plastics Division must cover its variable cost and the opportunity cost of filling the order. 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

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76) Two of the decentralized divisions of Gamberi Electronics Corporation are the Plastics Division and the Components Division. The Plastics Division sells molded parts to both the Components Division and to customers outside the corporation. Assume that the Plastics Division is currently operating with idle capacity. Also assume that the Components Division wants to purchase from Plastics all of the additional parts that could be made with this idle capacity. In order to increase its current level of profitability, the Plastics Division should accept any transfer price on these additional parts that is above the: A) variable cost of the additional parts. p arts. B) full (absorption) cost of the additional parts. C) variable cost of the additional parts plus the lost contribution margin on all units that could no longer be sold to customers outside the corporation. D) full (absorption) cost of the additional parts plus the lost contribution margin on all units that could no longer be sold to customers outside the corporation. Answer: A Explanation: In this case there is no opportunity cost, so so the Plastics Division only needs to cover its variable cost. 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

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77) Yearout Products, Inc., has a Valve V alve Division that manufactures and sells a number of  products, including a standard valve that could be used by another division in the company, the Pump Division, in one of its products. Data concerning that valve appear below:

Capacity in units Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

58,000 $ 59 $ 40 $ 11

The Pump Division is currently purchasing 9,000 of these valves per year from an overseas supplier at a cost of $53 per p er valve. Assume that the Valve Division is selling all of the valves it can produce to outside customers. Does there exist a transfer price that would make both the Valve and Pump Division financially  better off than if the Pump Division were to continue buying its valves from the outside supplier? A) 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. B) 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. C) The answer cannot be determined from the information that has been provided. D) 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.

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

Selling price to outside customers Variable cost per unit Unit contribution margin Reduction in outside unit sales Total contribution margin on lost sales

$ $ $

59 40 19 9,000 $ 171,000

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 co ntribution margin on lost sales ÷ Number of units transferred) Transfer price > $40 per unit + ($171,000 ÷ 9,000 units) = $40 per unit + $19 per u unit nit = $59 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 < $53 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 max imum 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

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78) Yearout Products, Inc., has a Valve Division that manufactures and sells a number of  products, including a standard valve that could be used by another division in the company, the Pump Division, in one of its products. Data concerning that valve appear below:

Capacity in units Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

58,000 $ 59 $ 40 $ 11

The Pump Division is currently purchasing 9,000 of these valves per year from an overseas supplier at a cost of $53 per p er valve. Assume that the Valve Division is selling all of the valves it can produce to outside customers. Also assume that $1 in variable expenses can be avoided on transfers within the company due to reduced shipping and selling costs. Does there exist a transfer price that would make both the Valve and Pump Division financially better off than if the Pump Division were to continue  buying its valves from the outside supplier? A) Yes, the minimum transfer price that the selling division d ivision should be willing to accept is less than the maximum transfer price that the buying division would accept. B) The answer cannot be determined from the information that has been provided. C) No, the minimum transfer price that the selling division should be willing to accept exceeds exceed s the maximum transfer price that the buying division would accept. D) 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.

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

Selling price to outside customers Variable cost per unit Unit contribution margin Reduction in outside unit sales Total contribution margin on lost sales

$ $ $

59 40 19 9,000 $ 171,000

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 co ntribution margin on lost sales ÷ Number of units transferred) Transfer price > ($40 per unit − $1 per unit) + ($171,000 ÷ 9,000 units) = $39 per unit + $19 p per er unit = $58 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 < $53 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 max imum price that the buying division d ivision is willing to pay. 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

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79) Ahart Products, Inc., has a Transmitter Division that manufactures manu factures and sells a number of  products, including a standard transmitter that could be used by another division in the company, the Remote Devices Division, in one of its products. Data concerning that transmitter appear  below:

Capacity in units Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

79,000 $ 61 $ 42 $ 8

The Remote Devices Division is currently purchasing 4,000 of these transmitters per year from an overseas supplier at a cost of $59 $5 9 per transmitter. What is the maximum price that the Remote Devices Division should be willing to pay for transmitters transferred from the Transmitter Division? A) $8 per unit B) $50 per unit C) $59 per unit D) $42 per unit Answer: C Explanation: From the perspective of the purchasing division, the transfer is is financially attractive if and only if: Transfer price < Cost of buying from outside supplier Transfer price < $59 per unit 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

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80) Ahart Products, Inc., has a Transmitter Division that manufactures manu factures and sells a number of  products, including a standard transmitter that could be used by another division in the company, the Remote Devices Division, in one of its products. Data concerning that transmitter appear  below:

Capacity in units Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

79,000 $ 61 $ 42 $ 8

The Remote Devices Division is currently purchasing 4,000 of these transmitters per year from an overseas supplier at a cost of $59 $5 9 per transmitter. Assume that the Valve Division is selling all of the valves it can produce to outside customers. Also assume that $3 in variable expenses can c an be avoided on transfers within the company due to reduced shipping and selling costs. What should be the minimum acceptable transfer price for the valves from the standpoint of the Valve Division? A) $59 per unit B) $61 per unit C) $47 per unit D) $58 per unit

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

Selling price to outside customers Variable cost per unit Unit contribution margin Reduction in outside unit sales Total contribution margin on lost sales

$ $ $

61 42 19 4,000 $ 76,000

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 > ($42 per unit − $3 per unit) + ($76,000 ÷ 4,000 units) = $39 per unit + $19 per unit = $58 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

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81) Steinhoff Products, Inc., has a Sensor Division that manufactures and sells a number of  products, including a standard sensor that could be used by another division in the company, the Safety Products Division, in one of its products. Data concerning that sensor appear below:

Capacity in units Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

51,000 $ 56 $ 37 $ 14

The Safety Products Division is currently purchasing 4,000 of these sensors per year from an overseas supplier at a cost of $48 per sensor. What is the maximum price that the Safety Products Division should be willing to pay for sensors transferred from the Sensor Division? A) $51 per unit B) $37 per unit C) $48 per unit D) $14 per unit Answer: C Explanation: From the perspective of the purchasing division, the transfer transfer is financially attractive if and only if: Transfer price < Cost of buying from outside supplier Transfer price < $48 per unit 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

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82) Steinhoff Products, Inc., has a Sensor Division that manufactures and sells a number of  products, including a standard sensor that could be used by another division in the company, the Safety Products Division, in one of its products. Data concerning that sensor appear below:

Capacity in units Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

51,000 $ 56 $ 37 $ 14

The Safety Products Division is currently purchasing 4,000 of these sensors per year from an overseas supplier at a cost of $48 per sensor. Assume that the Valve Division is selling all of the valves it can produce to outside customers. From the standpoint of the Valve Division, what is the lost contribution margin if the valves are transferred internally rather than sold to outside customers? A) $76,000 B) $969,000 C) $120,000 D) $20,000 Answer: A Explanation: The total contribution margin on lost sales is computed as follows:

Selling price to outside customers Variable cost per unit Unit contribution margin Reduction in outside unit sales Total contribution margin on lost sales

$ $ $

56 37 19 4,000 $ 76,000

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

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83) Wetherald Products, Inc., has a Pump Division that manufactures and sells a number of  products, including a standard pump that could be used by another division in the company, the Pool Products Division, in one of its products. Data concerning that pump appear below:

Capacity in units Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

55,000 $ 82 $ 53 $ 11

The Pool Products Division is currently purchasing 4,000 of these pumps per year from an overseas supplier at a cost of $74 per pump. Assume that the Pump Division has enough idle capacity to handle all of the Pool Products Division's needs. What should be the minimum acceptable transfer price for the pumps from the standpoint of the Pump Division? A) $74 per unit B) $53 per unit C) $64 per unit D) $82 per unit Answer: B Explanation: From the perspective of the selling division, profits profits would increase as a result of the transfer if and only if: Transfer price > Variable cost per unit + (Total contribution co ntribution margin on lost sales ÷ Number of units transferred) Transfer price > $53 per unit + ($0 ÷ 4,000 units) = $53 per unit + $0 per unit = $53 per unit 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

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84) Wetherald Products, Inc., has a Pump Division that manufactures and sells a number of  products, including a standard pump that could be used by another division in the company, the Pool Products Division, in one of its products. Data concerning that pump appear below:

Capacity in units Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

55,000 $ 82 $ 53 $ 11

The Pool Products Division is currently purchasing 4,000 of these pumps per year from an overseas supplier at a cost of $74 per pump. Assume that the Pump Division is selling all of the pumps p umps it can produce to outside customers. What should be the minimum acceptable transfer price for the pumps from the standpoint of the Pump Division? A) $64 per unit B) $74 per unit C) $82 per unit D) $53 per unit

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

Selling price to outside customers Variable cost per unit Unit contribution margin Reduction in outside unit sales Total contribution margin on lost sales

$ $ $

82 53 29 4,000 $ 116,000

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 co ntribution margin on lost sales ÷ Number of units transferred) Transfer price > $53 per unit + ($116,000 ÷ 4,000 units) = $53 per unit + $29 per unit = $82 per unit 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

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85) Wetherald Products, Inc., has a Pump Division that manufactures and sells a number of  products, including a standard pump that could be used by another division in the company, the Pool Products Division, in one of its products. Data concerning that pump appear below:

Capacity in units Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

55,000 $ 82 $ 53 $ 11

The Pool Products Division is currently purchasing 4,000 of these pumps per year from an overseas supplier at a cost of $74 per pump. Assume that the Valve Division is selling all of the valves it can produce to outside customers. Also assume that $5 in variable expenses can be avoided on transfers within the company due to reduced shipping and selling costs. What should be the minimum acceptable transfer price for the valves from the standpoint of the Valve Division? A) $77 per per unit unit B) $74 C) $59 per unit D) $82 per unit

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

Selling price to outside customers Variable cost per unit Unit contribution margin Reduction in outside unit sales Total contribution margin on lost sales

$ $ $

82 53 29 4,000 $ 116,000

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 co ntribution margin on lost sales ÷ Number of units transferred) Transfer price > ($53 per unit − $5 per unit) + ($116,000 ÷ 4,000 units) = $48 per unit + $29 p per er unit = $77 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

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86) Creaser Products, Inc., has a Sensor Division that manufactures and sells a number of  products, including a standard sensor. Data concerning that sensor appear below: Capacity in units Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

42,000 $85 $50 $28

The company has a Safety Products Division that could use this sensor in one of its products. The Safety Products Division is currently purchasing 8,000 of these sensors per year from an overseas supplier at a cost of $76 per sensor. Required: The Sensor Division is selling all of the sensors it can produce to outside customers. Also assume that $10 in variable expenses can be avoided on transfers within the company due to reduced shipping and selling costs. What is the acceptable range, if any, for the transfer price  between the two divisions? Answer: The total contribution margin on lost sales is computed follows: Selling price to outside customers $85 as follows: Variable cost per unit $50 Unit contribution margin $35 Reduction in outside unit sales 8,000 Total contribution margin on lost sales $280,000 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 co ntribution margin on lost sales ÷ Number of units transferred) Transfer price > $40 per unit + ($280,000 ÷ 8,000 units) = $40 per unit + $35 per unit un it = $75 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 supp lier Transfer price < $76 per unit Combining the two requirements, the range of acceptable transfer prices is: $75 per unit < Transfer price < $76 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: BB Critical Thinking; FN Measurement

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87) Cominsky Products, Inc., has a Screen S creen Division that manufactures and sells a number of  products, including a standard screen. Data concerning that screen appear below: Capacity in units Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

74,000 $98 $61 $14

The company has a Home Security Division that could use this screen in one of its products. The Home Security Division is currently purchasing 6,000 of these screens per year from an overseas supplier at a cost of $96 per screen. Required: Assume that the Screen Division is selling all of the screens it can c an produce to outside customers. What is the acceptable range, if any, any , for the transfer price between the two divisions? Answer: The total contribution margin on lost sales is computed as follows: follows: Selling price to outside customers $98 Variable cost per unit Unit contribution margin Reduction in outside unit sales Total contribution margin on lost sales

$61 $37 6,000 $222,000

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 co ntribution margin on lost sales ÷ Number of units transferred) Transfer price > $61 per unit + ($222,000 ÷ 6,000 units) = $61 per unit + $37 per unit = $98 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 < $96 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 max imum 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: BB Critical Thinking; FN Measurement

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88) Gauani Products, Inc., has a Detector Division that manufactures and sells a number of  products, including a standard detector. Data concerning that detector appear below: Capacity in units Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

51,000 $72 $35 $17

The company has a Commercial Security Division that could use this detector in one of its  products. The Commercial Security Division is currently purchasing 5,000 of these detectors per year from an overseas supplier at a cost of $65 per detector. Required: a. Assume that the Detector Division has enough enou gh idle capacity to handle all of the Commercial Security Division's needs. What is the acceptable range, if any, for the transfer price between the two divisions?  b. Assume that the Detector Division is selling all of the detectors it can produce to outside customers. What is the acceptable range, if any, for the transfer price between the two divisions?

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Answer: a. 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 co ntribution margin on lost sales ÷ Number of units transferred) Transfer price > $35 per unit + ($0 ÷ 5,000 units) = $35 per u unit nit + $0 per unit = $35 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 < $65 per unit Combining the two requirements, the range of acceptable transfer prices is: $35 per unit < Transfer price < $65 per unit  b. The total contribution margin on lost sales is computed as follows: Selling price to outside customers $72 Variable cost per unit $35 Unit contribution margin Reduction in outside unit sales Total contribution margin on lost sales

$37 5,000 $185,000

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 co ntribution margin on lost sales ÷ Number of units transferred) Transfer price > $35 per unit + ($185,000 ÷ 5,000 units) = $35 per unit + $37 per unit un it = $72 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 < $65 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 max imum 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: BB Critical Thinking; FN Measurement

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89) Lank Products, Inc., has a Transmitter Division that manufactures and sells a number of  products, including a standard transmitter. Data concerning that transmitter appear below: Capacity in units Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

69,000 $62 $31 $15

The company has a Remote Devices Division that could use this transmitter in one of its  products. The Remote Devices Division is currently purchasing 11,000 of these transmitters per year from an overseas supplier at a cost of $53 per transmitter. Required: The Transmitter Division is selling all of the transmitters it can produce to outside customers. Also assume that $6 in variable expenses can be avoided on transfers within the company due to reduced shipping and selling costs. What is the acceptable range, if any, for the transfer price  between the two divisions? Answer: The to total contribution margin on lost sales is computed as follows: follows: Selling price outside customers $62 Variable cost per unit $31 Unit contribution margin $31 Reduction in outside unit sales 11,000 Total contribution margin on lost sales $341,000 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 co ntribution margin on lost sales ÷ Number of units transferred) Transfer price > $25 per unit + ($341,000 ÷ 11,000 units) = $25 per unit + $31 per u unit nit = $56 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 < $53 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 max imum price that the buying division is willing to pay. 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: BB Critical Thinking; FN Measurement

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90) Manni Products, Inc., has a Pump Division that manufactures and sells a number of products, including a standard pump. Data concerning that pump appear below: Capacity in units Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

68,000 $68 $38 $23

The company has a Pool Products Division that needs 7,000 special heavy-duty pumps per year. The Pump Division's variable cost to manufacture and ship this special pump would be $43 $4 3 per unit. Making these special pumps would require more manufacturing resources. Therefore, the Pump Division would have to reduce its production and sales of regular pumps to outside customers from 68,000 units per year to 56,100 56,10 0 units per year. Required: As far as the Pump Division is concerned, con cerned, what is the lowest acceptable transfer price for the special pumps? Answer:of the To regular producepumps the 7,000 special specialcustomers. pumps, the Pump Division will have to give up sales of 11,900 to outside Selling price to outside customers Variable cost per unit Unit contribution margin Reduction in outside unit sales Total contribution margin on lost sales

$68 $38 $30 11,900 $357,000

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 co ntribution margin on lost sales ÷ Number of units transferred) Transfer price > $43.00 per unit + ($357,000 ÷ 7,000 units) = $43.00 per unit + $51.00 per unit = $94.00 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: BB Critical Thinking; FN Measurement

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91) Fyodor Corporation has a Parts Division that does work for other Divisions in the company as well as for outside customers. The company's Machine Division has asked the Parts Division to provide it with 8,000 special parts p arts each year. The special pa parts rts would require $19.00 per unit in variable production costs. The Machine Division has a bid from an outside supplier for the special parts at $27.00 $27. 00 per unit. In order to have time and space to produce the special part, the Parts Division would have to cut  back production of another part-the QR4 that it presently is producing. The QR4 sells for $34.00  per unit, and requires $18.00 per unit in variable production costs. Packaging and shipping costs of the QR4 are $2.00 per unit. Packaging and shipping costs for the new special part would be only $0.50 per unit. The Parts Division is now producing and selling 40,000 units of the QR4 each year. Production and sales of the QR4 would drop by 5% if the new special part is produced for the Machine Division. Required: a. What is the range of transfer prices within which both the Divisions' profits would increase as a result of agreeing to the transfer of 8,000 special parts per year from the Parts Division to the Machine Division?  b. Is it in the best interests of Fyodor Corporation for this transfer to take place? Explain.

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Answer: (Note: Due limitations limitations in fonts and word processing processing software, > and < signs must be used in this solution rather than "greater than or equal to" and "less than or o r equal to" signs.) a. From the perspective of the Parts Division, profits would increase as a result of the transfer if and only if: Transfer price > Variable cost + Opportunity cost The opportunity cost is the contribution margin on o n the lost sales, divided by the number of units transferred: Opportunity cost = [($34.00-$18.00-$2.00) × 2,000*]/8,000 = $3.50 * 5% × 40,000 = 2,000 Therefore, Transfer price > ($19.00+$0.50)+$3.50 = $23.00. From the viewpoint of the Machine Division, the transfer price must be less than the cost of  buying the units from the outside supplier. Therefore, Transfer price < $27.00. Combining the two requirements, we get the following range of transfer prices: $23.00 < Transfer price < $27.00.  b. Yes, the transfer should take place. From the viewpoint of the entire company, the cost of transferring the units within the company is $23.00, but the cost of purchasing the special parts from is $27.00. Therefore, the company's increase average $4.00the foroutside each ofsupplier the special sp ecial parts that is transferred within theprofits company, evenon though thisbywould cut into production and sales of another product. Difficulty: 3 Hard 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: BB Critical Thinking; FN Measurement

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92) Trendell Products, Inc., has a Motor Division that manufactures man ufactures and sells a number of  products, including a standard motor. Data concerning that motor appear below: Capacity in units Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

65,000 $75 $36 $29

The company has a Automotive Division that could use this motor in one of its products. The Automotive Division is currently purchasing 8,000 of these motors per year yea r from an overseas supplier at a cost of $66 per p er motor. Required: Assume that the Motor Division has enough idle capacity to handle all of the Automotive Division's needs. What is the acceptable range, if any, for the transfer price between the two divisions? Answer: From the perspective of the selling division, profits would increase as a result of the transfer and only if: Transferifprice > Variable cost per unit + (Total contribution co ntribution margin on lost sales ÷ Number of units transferred) Transfer price > $36 per unit + ($0 ÷ 8,000 units) = $36 per u unit nit + $0 per unit = $36 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 < $66 per unit Combining the two requirements, the range of acceptable transfer prices is: $36 per unit < Transfer price < $66 per unit 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: BB Critical Thinking; FN Measurement

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93) Shular Products, Inc., has a Valve Division that manufactures and sells a number of products, including a standard valve that could be used by another division, the Division, in one of its  products. Data concerning that valve appear below: Capacity in units Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

69,000 $53 $33 $10

The company has a Pump Division that could use this valve in one of its products. The Pump Division is currently purchasing 8,000 of these valves per year from an overseas supplier at a cost of $47 per valve. Required: a. Assume that the Valve Division has enough idle capacity to handle all of the Pump Division's needs. What is the acceptable range, if any, for the transfer price between the two divisions?  b. Assume that the Valve Division is selling all of the valves it it can produce to outside customers. Also assume that $5 in variable expenses can be avoided on transfers within the company due to reduced shipping and selling costs. What is the acceptable range, if any, for the transfer price  between the two divisions?

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Answer: a. 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 co ntribution margin on lost sales ÷ Number of units transferred) Transfer price > $33 per unit + ($0 ÷ 8,000 units) = $33 per u unit nit + $0 per unit = $33 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 < $47 per unit Combining the two requirements, the range of acceptable transfer prices is: $33 per unit < Transfer price < $47 per unit  b. The total contribution margin on lost sales is computed as follows: Selling price to outside customers $53 Variable cost per unit $33 Unit contribution margin Reduction in outside unit sales Total contribution margin on lost sales

$20 8,000 $160,000

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 co ntribution margin on lost sales ÷ Number of units transferred) Transfer price > $28 per unit + ($160,000 ÷ 8,000 units) = $28 per unit + $20 per unit un it = $48 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 < $47 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 max imum price that the buying division is willing to pay. 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: BB Critical Thinking; FN Measurement

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94) Prejean Products, Inc., has a Relay Division that manufactures and sells a number of  products, including a standard relay. Data concerning that relay appear below: Capacity in units Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

78,000 $81 $56 $19

The company has a Electronics Division that could use this relay in one of o f its products. The Electronics Division is currently purchasing 9,000 of these relays per year from an overseas supplier at a cost of $74 per relay. Required: a. Assume that the Relay Division has enough idle capacity to hand handle le all of the Electronics Division's needs. What is the acceptable range, if any, for the transfer price between the two divisions?  b. Assume that the Relay Division is selling all of the relays it it can produce to outside customers. Also assume that $13 in variable expenses can be avoided on transfers within the company due to reduced and selling costs. c osts. What is the acceptable range, if any, for the transfer price  between theshipping two divisions?

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Answer: a. 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 co ntribution margin on lost sales ÷ Number of units transferred) Transfer price > $56 per unit + ($0 ÷ 9,000 units) = $56 per u unit nit + $0 per unit = $56 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 < $74 per unit Combining the two requirements, the range of acceptable transfer prices is: $56 per unit < Transfer price < $74 per unit  b. The total contribution margin on lost sales is computed as follows: Selling price to outside customers $81 Variable cost per unit $56 Unit contribution margin Reduction in outside unit sales Total contribution margin on lost sales

$25 9,000 $225,000

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 co ntribution margin on lost sales ÷ Number of units transferred) Transfer price > $43 per unit + ($225,000 ÷ 9,000 units) = $43 per unit + $25 per unit = $68 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 < $74 per unit Combining the two requirements, the range of acceptable transfer prices is: $68 per unit < Transfer price < $74 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: BB Critical Thinking; FN Measurement

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95) Zumsteg Products, Inc., has a Pump P ump Division that manufactures and sells a number of  products, including a standard pump. Data concerning that pump appear below: Capacity in units Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

71,000 $88 $61 $19

The company has a Pool Products Division that could use this pump in one of its products. The Pool Products Division is currently purchasing 7,000 of these pumps per year from an overseas ov erseas supplier at a cost of $81 per pump. Required: Assume that the Pump Division has enough idle capacity to handle all of the Pool Products Division's needs. What is the acceptable range, if any, for the transfer price between the two divisions? Answer: From the perspective of the selling division, profits would increase as a result of the transfer and only if: Transferifprice > Variable cost per unit + (Total contribution co ntribution margin on lost sales ÷ Number of units transferred) Transfer price > $61 per unit + ($0 ÷ 7,000 units) = $61 per unit + $0 per unit = $61 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 Combining the two requirements, the range of acceptable transfer prices is: $61 per unit < Transfer price < $81 per unit 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: BB Critical Thinking; FN Measurement

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96) Division Y has asked Division X of the same company to supply it with 5,000 units of part L763 this year to use in one o ne of its products. Division Y has received a bid from an outside supplier for the parts at a price of $33.00 per unit. Division X has the capac capacity ity to produce 20,000 units of part L763 per year. Division X expects to sell 18,000 units of p part art L763 to outside customers this year at a price of $34.00 per unit. To fill the o order rder from Division Y, Division X would have to cut back ba ck its sales to outside customers. Division X produces part L763 at a variable cost of $25.00 per unit. The cost of packing and shipping the parts for outside customers is $2.00 per unit. These packing and shipping costs would not have to be incurred on sales of the  parts to Division Y. Required: a. What is the range of transfer prices within which both the Divisions' profits would increase as a result of agreeing to the transfer of 5,000 parts this year from Division Y to Division X?  b. Is it in the best interests of the overall overall company for this transfer to take place? Explain.

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Answer: (Note: Due limitations limitations in fonts and word processing processing software, > and < signs must must be used in this solution rather than "greater than or equal to" and "less than or o r equal to" signs.) a. From the perspective of Division Y, profits would increase as a result of the transfer if and only if: Transfer price > Variable cost + Opportunity cost The opportunity cost is the contribution margin on o n the lost sales, divided by the number of units transferred: Opportunity cost = [($34.00 - $25.00 - $2.00)×3,000*]/5,000 = $4.20 * Demand from outside customers Units required by Division Y Total requirements Capacity Required reduction in sales to outside customers

18,000 5,000 23,000 20,000 3,000

Therefore, Transfer price > $25.00 + $4.20 = $29.20. From the viewpoint of Division X, the transfer price must be less than the cost of buying the units from the outside supplier. Therefore, Transfer price < $33.00. Combining the two requirements, we get the following range of transfer prices: $29.20 < Transfer price < $33.00.  b. Yes, the transfer should take place. From the viewpoint of the entire company, the cost of transferring the units within the company is $29.20, but the cost of purchasing them from the outside supplier is $33.00. Therefore, the company's compan y's profits increase on average by $3.8 $3.80 0 for each of the special parts that is transferred within the company. Difficulty: 3 Hard 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: BB Critical Thinking; FN Measurement

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97) Starcic Products, Inc., has a Connector Division that manufactures and sells a number of  products, including a standard connector. Data concerning that connector appear below: Capacity in units Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

45,000 $86 $57 $15

The company has a Transmission Division that needs 6,000 special heavy-duty connectors per year. The Connector Division's variable cost to manufacture ma nufacture and ship this special connector would be $62 per unit. un it. Making these special connectors would require more manufacturing resources. Therefore, the Connector Division would have to reduce its production and sales of regular connectors to outside customers from 45,000 units un its per year to 38,400 units per year. Required: As far as the Connector Division is concerned, what w hat is the lowest acceptable transfer price for the special connectors? Answer: To produce the the 6,000 connectors, the Connector Division will have to give up sales of 6,600 of the regular connspecial connectors ectors to outside customers. Selling price to outside customers Variable cost per unit Unit contribution margin Reduction in outside unit sales Total contribution margin on lost sales

$86 $57 $29 6,600 $191,400

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 co ntribution margin on lost sales ÷ Number of units transferred) Transfer price > $62.00 per unit + ($191,400 ÷ 6,000 units) = $62.00 per unit + $31.90 per unit = $93.90 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: BB Critical Thinking; FN Measurement

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98) Stibbins Products, Inc., has a Receiver Re ceiver Division that manufactures and sells a number of  products, including a standard receiver. Data concerning that receiver appear below: Capacity in units Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

45,000 $88 $61 $15

The company has a Industrial Products Division that could use this receiver in one of its  products. The Industrial Products Division is currently currently purchasing 6,000 of these receivers per year from an overseas supplier at a cost of $79 per receiver. Required: a. Assume that the Receiver Division is selling all of the receivers it can produce to outside customers. What is the acceptable range, if any, for the transfer price between the two divisions?  b. Assume again that the Receiver Division is selling all of the receivers receivers it can produce to outside customers. Also assume that $13 in variable expenses expen ses can be avoided on transfers within the company due to reduced shipping and selling costs. What is the acceptable range, if any, for the transfer price between the two divisions? Answer: a. The total contribution margin on lost sales is computed as follows: Selling price to outside customers $88 Variable cost per unit $61 Unit contribution margin $27 Reduction in outside unit sales 6,000 Total contribution margin on lost sales $162,000 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 co ntribution margin on lost sales ÷ Number of units transferred) Transfer price > $61 per unit + ($162,000 ÷ 6,000 units) = $61 per unit + $27 per unit un it = $88 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 < $79 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 max imum price that the buying division is willing to pay.

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 b. The total contribution margin on lost sales is computed as follows: Selling price to outside customers $88 Variable cost per unit $61 Unit contribution margin $27 Reduction in outside unit sales 6,000 Total contribution margin on lost sales $162,000 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 co ntribution margin on lost sales ÷ Number of units transferred) Transfer price > $48 per unit + ($162,000 ÷ 6,000 units) = $48 per unit + $27 per unit = $75 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 < $79 per unit Combining the two requirements, the range of acceptable transfer prices is: $75 per unit < Transfer price < $79 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: BB Critical Thinking; FN Measurement

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99) Vandermeer Products, Inc., has a Antennae Division that manufactures and sells a nu number mber of  products, including a standard antennae. Data concerning that antennae appear below: Capacity in units Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

88,000 $97 $50 $23

The company has a Aircraft Products Division that could use this antennae in one of its products. The Aircraft Products Division is currently purchasing 11,000 of these antennaes ante nnaes per year from an overseas supplier at a cost of $88 per antennae. Required: a. Assume that the Antennae Division is selling all of the antennaes it can produce p roduce to outside customers. What is the acceptable range, if any, for the transfer price between the two divisions?  b. Assume again that the Antennae Division is selling all of the antennaes it can produce to outside customers. Also assume that $1 in variable expenses can be avoided on o n transfers within the company due to reduced shipping and selling costs. What is the acceptable range, if any, for the transfer price between the two divisions? Answer: a. The total contribution margin on lost sales is computed as follows: Selling price to outside customers $97 Variable cost per unit $50 Unit contribution margin $47 Reduction in outside unit sales 11,000 Total contribution margin on lost sales $517,000 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 co ntribution margin on lost sales ÷ Number of units transferred) Transfer price > $50 per unit + ($517,000 ÷ 11,000 units) = $50 per unit + $47 per unit = $97 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 < $88 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 max imum price that the buying division is willing to pay.

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 b. The total contribution margin on lost sales is computed as follows: Selling price to outside customers $97 Variable cost per unit $50 Unit contribution margin $47 Reduction in outside unit sales 11,000 Total contribution margin on lost sales $517,000 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 co ntribution margin on lost sales ÷ Number of units transferred) Transfer price > $49 per unit + ($517,000 ÷ 11,000 units) = $49 per unit + $47 per unit = $96 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 < $88 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 max imum price that the buying division is willing to pay. 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: BB Critical Thinking; FN Measurement

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100) Chesley Products, Inc., has a Connector Division that manufactures and sells a nu number mber of  products, including a standard connector. Data concerning that connector appear below: Capacity in units Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

40,000 $89 $43 $22

The company has a Transmission Division that could use this connector in one of its products. The Transmission Division is currently purchasing 8,000 of these connectors per year from an overseas supplier at a cost of $82 per connector. Required: a. Assume that the Connector Division has enough enoug h idle capacity to handle all of the Transmission Division's needs. What is the acceptable range, if any, for the transfer price between the two divisions?  b. Assume that the Connector Division is selling all of the connectors it it can produce to outside customers. What is the acceptable range, if any, for the transfer price between the two divisions? c. Assume again that the Connector Conn ector Division is selling all of the connectors it can produce to outside customers. Also assume that $3 in variable expenses can be avoided on o n transfers within the company due to reduced shipping and selling costs. What is the acceptable range, if any, for the transfer price between the two divisions? Answer: a. 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 co ntribution margin on lost sales ÷ Number of units transferred) Transfer price > $43 per unit + ($0 ÷ 8,000 units) = $43 per u unit nit + $0 per unit = $43 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 < $82 per unit Combining the two requirements, the range of acceptable transfer prices is: $43 per unit < Transfer price < $82 per unit  b. The total contribution margin on lost sales is computed as follows: Selling price to outside customers $89 Variable cost per unit $43 Unit contribution margin $46 Reduction in outside unit sales 8,000 Total contribution margin on lost sales $368,000

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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 co ntribution margin on lost sales ÷ Number of units transferred) Transfer price > $43 per unit + ($368,000 ÷ 8,000 units) = $43 per unit + $46 per unit un it = $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 < $82 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 max imum price that the buying division is willing to pay. c. The total contribution margin on lost sales is computed as follows: Selling price to outside customers $89 Variable cost per unit Unit contribution margin Reduction in outside unit sales Total contribution margin on lost sales

$43 $46 8,000 $368,000

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 co ntribution margin on lost sales ÷ Number of units transferred) Transfer price > $40 per unit + ($368,000 ÷ 8,000 units) = $40 per unit + $46 per unit un it = $86 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 < $82 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 ma ximum price that the buying division is willing to pay. 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: BB Critical Thinking; FN Measurement

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101) Liapis Products, Inc., has a Valve Division that manufactures and sells a number of  products, including a standard valve that could be used by another division, the Pump Division, in one of its products. Data concerning that valve appear below: Capacity in units Selling price to outside customers Variable cost per unit Fixed cost per unit (based on capacity)

66,000 $66 $38 $22

The Pump Division is currently purchasing 12,000 of these valves per year from an overseas o verseas supplier at a cost of $62 per valve. Required: a. Assume that the Valve Division has enough idle capacity to handle all of the Pump Division's needs. What is the acceptable range, if any, for the transfer price between the two divisions?  b. Assume that the Valve Division is selling all of the valves it it can produce to outside customers. What is the acceptable range, if any, any , for the transfer price between the two divisions? c. Assume again that the Valve Division is selling all of the valves it can produ produce ce to outside customers. Also assume that $7 in variable expenses can be avoided on transfers within the company due to reduced shipping and selling costs. What is the acceptable range, if any, for the transfer price between the two divisions? Answer: a. 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 co ntribution margin on lost sales ÷ Number of units transferred) Transfer price > $38 per unit + ($0 ÷ 12,000 units) = $38 per unit + $0 per unit = $38 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 < $62 per unit Combining the two requirements, the range of acceptable transfer prices is: $38 per unit < Transfer price < $62 per unit  b. The total contribution margin on lost sales is computed as follows: Selling price to outside customers $66 Variable cost per unit $38 Unit contribution margin $28 Reduction in outside unit sales 12,000 Total contribution margin on lost sales $336,000 From the perspective of the selling division, profits would increase as a result of the transfer if

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Transfer price > Variable cost per unit + (Total contribution co ntribution margin on lost sales ÷ Number of units transferred) Transfer price > $38 per unit + ($336,000 ÷ 12,000 units) = $38 per unit + $28 per unit = $66 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 < $62 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 max imum price that the buying division is willing to pay. c. The total contribution margin on lost sales is computed as follows: Selling price to outside customers $66 Variable cost per unit $38 Unit contribution margin $28 Reduction in outside unit sales Total contribution margin on lost sales

12,000 $336,000

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 co ntribution margin on lost sales ÷ Number of units transferred) Transfer price > $31 per unit + ($336,000 ÷ 12,000 units) = $31 per unit + $28 per unit = $59 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 < $62 per unit Combining the two requirements, the range of acceptable transfer prices is: $59 per unit < Transfer price < $62 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: BB Critical Thinking; FN Measurement

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102) Ulrich Company has a Castings C astings Division which does casting work of various types. The company's Machine Products Division has asked the Castings Division to provide it with 20,000 special castings each year on a continuing basis. The special casting would require $12 per unit in variable production costs. In order to have time and space to produce the new casting, the Castings Division would have to cut back production of another an other casting - the RB4 which it presently is producing. The RB4 sells for $40 per unit, and requires $18 per unit in variable production costs. Boxing and shipping costs of the RB4 are $6 per unit. Boxing and shipping costs for the new special casting would be only $1 per unit, thereby saving the company $5 per unit in cost. The company is now producing and selling 100,000 units of the RB4 each year. Production and sales of this casting would drop  by 25 percent if the new casting is produced. Some $240,000 in fixed production costs in the Castings Division are now being covered by the RB4 casting; 25 percent of these costs would have to be covered by the new casting if it is produced and sold to the Machine Products Division. Required: According to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division? Show all computations. compu tations. Answer: Transfer Price = Variable cost + Lost contribution margin per unit on outside outside sales Variable costs: Variable production costs Boxing and shipping Total

$12 1 $13

Lost contribution margin on outside sales: RB4 selling price per unit Variable costs per unit ($18 + $6) Contribution margin per unit Loss in production (100,000 × 0.25) Total lost contribution margin

$40 24 $16 × 25,000 $400,000

$400,000 ÷ 20,000 new castings = $20 per casting. Therefore, the lower limit on the transfer price should be: Transfer price = $13 + $20 = $33 per casting. Difficulty: 3 Hard 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