Transfer Pricing Quiz

AMIS 4310 Transfer Pricing Quiz

Use the following to answer questions 1-4: 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................................... Selling price of the item to outside customers....... Variable cost per unit............................................. Fixed cost per unit..................................................

80,000 units $35 $23 $5

Division Q of the Nyers Company requires 15,000 units per year and is currently paying an outside supplier $33 per unit. Consider each part below independently. 1. If outside customers demand only 50,000 units per year, what is the lowest acceptable transfer price from the viewpoint of the selling division? a. $35 b. $33 c. $28 d. $23 2. If outside customers demand 80,000 units, what is the lowest acceptable transfer price from the viewpoint of the selling division? a. $35 b. $33 c. $28 d. $23 3. 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, what is the lowest acceptable transfer price from the viewpoint of the selling division? a. $35 b. $21 c. $31 d. $33 4. If outside customers demand 70,000 units, what is the lowest acceptable transfer price from the viewpoint of the selling division for each of the 15,000 units

1

needed by Q? a. $33 b. $27 c. $28 d. $29 Use the following to answer questions 5-6: The BetaShoe Company manufactures only one type of shoe and has two divisions, the Sole Division, and the Assembly Division. The Sole Division manufactures soles for the Assembly Division, which completes the shoe and sells it to retailers. The Sole Division "sells" soles to the Assembly Division. The market price for the Assembly Division to purchase a pair of soles is $20. The fixed costs for the Sole Division are assumed to be $1 per pair at 100,000 units. The fixed costs for the Assembly Division are assumed to be $7 per pair at 100,000 units. Sole's costs per pair of soles are: Direct materials Direct labor Variable overhead Division fixed costs

$4 $3 $2 $1

Assembly's costs per completed pair of shoes are: Direct materials $6 Direct labor $2 Variable overhead $1 Division fixed costs $7 5.

Calculate and compare the difference in overall corporate net income between Scenario A and Scenario B if the Assembly Division sells 100,000 pairs of shoes for $60 per pair to customers. Scenario A: Negotiated transfer price of $15 per pair of soles Scenario B: Market-based transfer price a. $500,000 more net income under Scenario A b. $500,000 of net income using Scenario B c. $100,000 of net income using Scenario A. d. None of these answers is correct.

6.

If the Assembly Division sells 100,000 pairs of shoes at a price of $60 a pair to customers, and the transfer price is 180% of total costs of the Sole Division, what is the operating income of both divisions together? a. $4,400,000

2

b. c. d.

$3,400,000 $3,000,000 $2,600,000

7. Division X of Charter Corporation makes and sells a single product which is used by manufacturers of fork lift trucks. Presently it sells 12,000 units per year to outside customers at $24 per unit. The annual capacity is 20,000 units and the variable cost to make each unit is $16. Division Y of Charter Corporation would like to buy 10,000 units a year from Division X 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 X? a. $24.00 b. $21.40 c. $17.60 d. $16.00 Use the following information for questions 8 and 9:

The Buffalo Division of Alfred Products, Inc. has the capacity to manufacture 10,000 units of a certain part each year. This part sells for $12 per unit on the outside market. The Albany Division of Alfred Products, Inc. buys 3,000 units of this part each year from Buffalo, and thus far has paid the market price. Harlow Company (an outside supplier) has recently offered to sell Albany 3,000 units per year of the same part. Buffalo Division's costs relating to the product are:

3

8. Suppose that the Albany Division buys the 3,000 units from the outside supplier at a price of $10 per unit. Also suppose that the Buffalo Division can sell only 6,000 units on the outside market. This decision would have no effect on total fixed costs. As a result of Albany shifting its purchases to the outside supplier, the yearly net operating income of Alfred Products, Inc. as a whole will: a. decrease by $9,000 b. increase by $9,000 c. decrease by $6,000 d. increase by $6,000

9. Suppose that the Albany Division buys the 3,000 units from the outside supplier at a price of $10 per unit. Also suppose that the Buffalo Division can sell 10,000 units on the outside market. As a result of Albany shifting its purchases to the outside supplier, the yearly net operating income of Alfred Products, Inc. as a whole will: a. decrease by $9,000 b. increase by $9,000 c. decrease by $6,000 d. increase by $6,000

Use the following information for questions 10-12:

The Vega Division of Ace Company makes wheels which can either be sold to outside customers or transferred to the Walsh Division of Ace Company. Last month the Walsh Division bought all 4,000 of its wheels from the Vega Division for $42 each. The following data are available from last month's operations for the Vega Company:

If the Vega Division sells wheels to the Walsh Division, Vega can avoid $2 per wheel in sales commissions. An outside supplier has offered to supply wheels to the Walsh Division for $41 each.

4

10. Suppose that the Vega Division has ample idle capacity so that transfers to the Walsh Division would not cut into its sales to outside customers. What should be the lowest acceptable transfer price from the perspective of the Vega Division? a. $28 b. $30 c. $42 d. $45

11. What is the maximum price per wheel that Walsh should be willing to pay Vega? a. $28 b. $41 c. $42 d. $45

12. Suppose that Vega can sell 9,000 wheels each month to outside consumers, so transfers to the Walsh Division cut into outside sales. What should be the lowest acceptable transfer price from the perspective of the Vega Division? a. $28.00 b $31.75 c. $41.00 d. $42.00

5