ACCT 521 ACCT521 ACCT/521 Transfer Pricing Practice Problems rev-1

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ACCT 521 ACCT521 ACCT/521 Transfer Pricing Practice Problems rev-1

Transfer Pricing Practice Problems
These problems are intended to be an example of the types of problems that will be asked onan exam. They are not a comprehensive list of everything you should know for the exam. You should also review your notes, clickers, and homework.
1.Which of the following is a characteristic of a management control system? A) It aids and coordinates the process of making decisions. B) It encourages short-term profitability and maximizing net income.C) It helps individuals throughout the organization to act independently and maximize theprofitability of their departments.D) It deals with coordinating planning across the organization and is not concerned withbehavioral aspects of management like employee motivation.
2.

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ACCT 521 ACCT521 ACCT/521 Transfer Pricing Practice Problems rev-1

Transfer Pricing Practice Problems
These problems are intended to be an example of the types of problems that will be asked onan exam. They are not a comprehensive list of everything you should know for the exam. You should also review your notes, clickers, and homework.
1.Which of the following is a characteristic of a management control system? A) It aids and coordinates the process of making decisions. B) It encourages short-term profitability and maximizing net income.C) It helps individuals throughout the organization to act independently and maximize theprofitability of their departments.D) It deals with coordinating planning across the organization and is not concerned withbehavioral aspects of management like employee motivation.
2.Which of the following statements is true of decentralization?
3.A transfer-pricing method leads to goal congruence when ________.Answer the following questions using the information below:Branded Shoe Company manufactures only one type of shoe and has two divisions, the Stitching Division and the Polishing Division.
The Stitching Division manufactures shoes for the PolishingDivision, which completes the shoe and sells it to retailers. The Stitching Division “sells “shoes
Division, which completes the shoe and sells it to retailers. The Stitching Division “sells “shoes to the Polishing Division. The market price for the Polishing Division to purchase a pair of shoesis $42. (Ignore changes in inventory.)
Stitching’s costs per pair of soles are:Direct materials$10Direct labor$ 8Variable overhead$ 6Division fixed costs$ 4Polishing’s costs per completed pair of shoes are:Direct materials$14Direct labor$ 6Variable overhead$ 4Division fixed costs$16
4. What is the market-based transfer price per pair of shoes from the Stitching Division to thePolishing Division?A) $20 B) $32 C) $42D) $52
5.What is the transfer price per pair of shoes from the Stitching Division to the Polishing Division ifthe method used to place a value on each pair of shoes is 180% of variable costs?
6. What is the transfer price per pair of shoes from the Stitching Division to the Polishing Divisionif the transfer price per pair of soles is 125% of full costs?

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7.Calculate and compare the difference in overall corporate net income of Branded Shoe Companybetween Scenario A and Scenario B if the Polishing Division sells 100,000 pairs of shoes for$120 per pair to customers.Scenario A: Negotiated transfer price of $30 per pair of solesScenario B: Market-based transfer price
8. Assume the transfer price for a pair of shoes is 180% of total costs of the Stitching Division and40,000 of soles are produced and transferred to the Polishing Division. The Stitching Division’soperating income is ________.A) $896,000 B) $720,000 C) $800,000 D) $880,000
9.If the Polishing Division sells 100,000 pairs of shoes at a price of $120 a pair to customers, whatis the operating income of both divisions together? (Assume that the Stitching Division has noother customers)A) $8,800,000 B) $6,800,000 C) $6,000,000 D) $5,200,000
10. The Lawman Corporation, the manufacturer of Easy rider lawnmowers, is a highly- decentralized company. Each division manager has full authority for sourcing decisions. The Engine Division of produces the engine for the lawnmower and the Assembly Division produces the lawnmower.
There is a market for the engine as well as the lawnmower. Each of the divisions has been designated as a profit center. The Assembly Division has always purchased 1,000 engines annually from the Engine Division. The Engine Division announced it is increasing it’s transfer price to $350.
In response, the Assembly Division was able to locate an external supplier that can provide the required engines for $280 per unit. The Engine Division has an annual production capacity of 1,000 units. Their incremental (variable) cost of producing each engine is $240 and fixed costs are $70. If the Engine Division

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does not produce the 1,000 engines, the equipment and facilities would be used for other production operations that would result in annual cash-operating savings of $60,000. Should the Assembly Division purchase from the external supplier? Why?
11. Highpoint Company produces coffee tables. Each table requires one set of assembly parts that are produced in Division A. The parts are then transferred to Division B for assembly into tables.The manager of each division is operating with complete autonomy and is being evaluated on thebasis of the division’s operating income.Division A has the capacity to produce 5,000 sets of parts a month.
The incremental cost for producing one set of the parts for one table in Division A is $120. Division A can sell the parts locally for $200 per set.The incremental cost to assemble a table in Division B is $220. Division B can sell a fully assembled table for $450 each.If Division A is operating at full capacity, what would be the minimum and maximum transfer prices for Division A and Division B respectively, and will the transfer take place?A)$120 minimum and $200 maximum; the transfer will take place.B)$120 minimum and $230 maximum; the transfer will take place.C)$200 minimum and $450 maximum; the transfer will take place.D)$200 minimum and $230 maximum; the transfer will take place.

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12. Highpoint Company produces coffee tables. Each table requires one set of assembly parts that are produced in Division A. The parts are then transferred to Division B for assembly into tables.The manager of each division is operating with complete autonomy and is being evaluated on thebasis of the division’s operating income.Division A has the capacity to produce 5,000 sets of parts a month.
The incremental cost for producing one set of the parts for one table in Division A is $120. Division A can sell the parts locally for $200 per set.The incremental cost to assemble a table in Division B is $220. Division B can sell a fully assembled table for $450 each.If Division A is operating 50% capacity, and Division B needs 2,000 units, what would be the minimum and maximum transfer prices for Division A and Division B respectively, and will the transfer take place?
Answer Key
1.A
2.B
3.C
4.C
5.C
6.D
7.D
8.A
9.D
10. D
11. D
12.B

ACCT 521 ACCT521 ACCT/521 Transfer Pricing Practice Problems rev-1

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