Transfer Pricing

c. achieve goal congruence among divisions

A company uses transfer pricing between its manufacturing and retail divisions. The MAIN purpose of transfer pricing is to:
a. maximize external sales only
b. reduce tax expenses only
c. achieve goal congruence among divisions
d. eliminate internal transactions
Answer: C

c. ₱120

A division can sell all its output externally at ₱120. Variable cost is ₱70. The division is at full capacity. Minimum transfer price is:
a. ₱70
b. ₱50
c. ₱120
d. ₱190

c. zero

If a division has excess capacity, the opportunity cost in transfer pricing is:
a. high
b. equal to market price
c. zero
d. equal to fixed cost

b. external market exists and is competitive

A transfer price based on market price is most appropriate when:
a. no external market exists
b. external market exists and is competitive
c. division is unprofitable
d. fixed cost is high

b. contribution margin lost from external sale

A selling division is operating at full capacity. The opportunity cost of transferring internally is:
a. zero
b. contribution margin lost from external sale
c. fixed cost
d. depreciation

b. internal price is higher than external price

A buying division prefers to purchase externally rather than internally when:
a. internal price is lower
b. internal price is higher than external price
c. capacity is unlimited
d. fixed cost is zero

a. overstate selling division profit

A transfer price that is too low will most likely:
a. overstate selling division profit
b. increase buying division profit only
c. eliminate opportunity cost
d. reduce company profit

c. discourages cost control incentives

One disadvantage of cost-based transfer pricing is that it:
a. is always equal to market price
b. ignores external competition
c. discourages cost control incentives
d. eliminates profit measurement

b. variable cost + opportunity cost

When there is no idle capacity, the BEST transfer price includes:
a. only variable cost
b. variable cost + opportunity cost
c. only fixed cost
d. depreciation only

b. division decisions align with company objectives

Goal congruence means:
a. divisions compete against each other
b. division decisions align with company objectives
c. profit is ignored
d. only cost matters

b. dysfunctional behavior

A division rejects internal transfer because it lowers its own profit, even though company profit increases. This is:
a. goal congruence
b. dysfunctional behavior
c. cost control
d. decentralization

c. agreement between divisions

A negotiated transfer price is set by:
a. external auditors
b. government
c. agreement between divisions
d. fixed formula only

b. outlay cost + opportunity cost

The general transfer pricing rule is:
a. variable cost only
b. outlay cost + opportunity cost
c. fixed cost + profit
d. market price + tax

b. divisions have decision-making authority

Decentralization in transfer pricing means:
a. top management decides everything
b. divisions have decision-making authority
c. no internal transfers
d. only cost centers exist

b. vertically integrated companies

Transfer pricing is most useful in:
a. single small businesses
b. vertically integrated companies
c. sole proprietorships
d. external markets only

b. buy externally

If internal transfer price is higher than external price, the buying division will:
a. buy internally
b. buy externally
c. stop production
d. increase fixed cost

b. goal congruence

A properly designed transfer pricing system should encourage:
a. divisional conflict
b. goal congruence
c. cost inflation
d. external dependency only

b. variable cost

When excess capacity exists, the BEST transfer price is usually:
a. market price
b. variable cost
c. full cost
d. selling price + markup

b. lost contribution from external sales

Opportunity cost in transfer pricing refers to:
a. accounting depreciation
b. lost contribution from external sales
c. fixed overhead allocation
d. marketing expense

b. affects divisional profit reporting

The MOST important effect of transfer pricing on performance evaluation is:
a. changes external revenue only
b. affects divisional profit reporting
c. eliminates costs
d. increases taxes only

c. Price of goods/services transferred between divisions

Transfer price is best defined as:
a. Cost of production only
b. Price charged to external customers only
c. Price of goods/services transferred between divisions
d. Market selling price only

c. Achieve goal congruence among divisions

The main objective of transfer pricing is to:
a. Maximize external sales only
b. Minimize taxes only
c. Achieve goal congruence among divisions
d. Increase fixed costs

c. Both buying and selling division performance

A transfer price affects:
a. Only selling division profit
b. Only buying division cost
c. Both buying and selling division performance
d. External customers only

a. Selling division profit increases, buying division profit decreases

If transfer price is high:
a. Selling division profit increases, buying division profit decreases
b. Both divisions benefit equally
c. Buying division profit increases
d. No effect on divisions

c. Decide whether to buy internally or externally

In a decentralized organization, managers usually:
a. Follow only top management decisions
b. Have no authority in pricing
c. Decide whether to buy internally or externally
d. Avoid performance evaluation

c. Outlay cost + opportunity cost

General rule for transfer pricing is:
a. Variable cost only
b. Fixed cost + profit margin
c. Outlay cost + opportunity cost
d. Market price only

b. Contribution margin lost from external sales

Opportunity cost in transfer pricing refers to:
a. Fixed cost of production
b. Contribution margin lost from external sales
c. Salary cost of managers
d. Marketing expenses

c. Equal to contribution margin lost

If there is NO excess capacity, opportunity cost is:
a. Zero
b. Equal to fixed cost
c. Equal to contribution margin lost
d. Equal to variable cost
Answer: C

a. Zero

If there IS excess capacity, opportunity cost is:
a. Zero
b. Maximum
c. Equal to market price
d. Equal to fixed cost

a. Variable cost + opportunity cost

Minimum transfer price formula is:
a. Variable cost + opportunity cost
b. Fixed cost + selling price
c. Market price – fixed cost
d. Revenue – cost

c. Variable cost + opportunity cost

A division is operating at full capacity. What should transfer price include?
a. Only variable cost
b. Variable cost only
c. Variable cost + opportunity cost
d. Fixed cost only

b. Variable cost only

A division has excess capacity. Minimum transfer price is closest to:
a. Market price
b. Variable cost only
c. Fixed cost + profit
d. Selling price externally

a. P40

If outside market price is P100 and variable cost is P60, contribution margin is:
a. P40
b. P60
c. P100
d. P160

b. Opportunity cost (CM from external sale)

If a division sells internally instead of externally, what is lost?
a. Fixed cost
b. Opportunity cost (CM from external sale)
c. Salary expense
d. Depreciation

b. Company profit is maximized

Best transfer decision occurs when:
a. Divisions maximize individual profit
b. Company profit is maximized
c. External buyers are ignored
d. Fixed cost increases

c. 100

Variable cost = 40, selling price = 100, no excess capacity. Minimum transfer price is:
a. 40
b. 60
c. 100
d. 140

a. 40

Variable cost = 40, selling price = 100, excess capacity exists. Minimum transfer price is:
a. 40
b. 60
c. 100
d. 140

b. It includes allocated fixed costs that may distort decisions

Why is full cost NOT ideal for transfer pricing?
a. It ignores taxes
b. It includes allocated fixed costs that may distort decisions
c. It is too simple
d. It increases profit automatically

b. Division performance evaluation

Transfer pricing mainly affects:
a. External competitors
b. Division performance evaluation
c. Government policy
d. Customer demand

c. Division goals align with company goals

Goal congruence means:
a. Divisions compete aggressively
b. Managers maximize their own profit only
c. Division goals align with company goals
d. Prices are always high

c. Sell goods/services to other divisions within the same company

Divisions within vertically integrated companies normally:
a. Sell only to external customers
b. Sell only to government units
c. Sell goods/services to other divisions within the same company
d. Do not sell goods at all

b. Selling division only

In negotiated transfer pricing, the minimum transfer price is determined by:
a. Buying division only
b. Selling division only
c. External customers only
d. Government regulations

b. Cost-based and market-based

The two main approaches in transfer pricing are:
a. Profit-based and tax-based
b. Cost-based and market-based
c. Internal and external
d. Fixed and variable

b. Variable cost only

A cost-based transfer price is commonly based on:
a. Fixed cost only
b. Variable cost only
c. Market price only
d. Selling price externally

b. Encourages inflation of costs without discipline

A limitation of cost-based transfer pricing is that it:
a. Improves external competition
b. Encourages inflation of costs without discipline
c. Has no effect on divisions
d. Always increases profit equally

b. Contribution margin lost from external sales

Opportunity cost in transfer pricing refers to:
a. Fixed cost allocation
b. Contribution margin lost from external sales
c. Salary expenses
d. Depreciation cost

b. Outlay cost + opportunity cost

The general rule for transfer pricing is:
a. Variable cost + fixed cost
b. Outlay cost + opportunity cost
c. Market price – tax
d. Revenue – expenses
Answer: B

c. There is no excess capacity

Transfer price includes opportunity cost when:
a. There is excess capacity
b. There is no demand
c. There is no excess capacity
d. Fixed costs are zero

b. Zero

When there is excess capacity, opportunity cost is:
a. High
b. Zero
c. Equal to fixed cost
d. Equal to market price

b. Contribution margin from best alternative use

Opportunity cost is best described as:
a. Historical cost
b. Contribution margin from best alternative use
c. Fixed overhead
d. Marketing expense

c. High selling division profit, low buying division profit

A high transfer price results in:
a. High buying division profit, low selling division profit
b. Low selling division profit, high buying division profit
c. High selling division profit, low buying division profit
d. No effect on profit

c. Achieve goal congruence

The main objective of transfer pricing is:
a. Increase taxes
b. Reduce costs only
c. Achieve goal congruence
d. Eliminate divisions

b. Divisions act against company goals

Dysfunctional behavior occurs when:
a. Employees follow rules
b. Divisions act against company goals
c. Profit increases
d. Costs decrease

b. Division performance

Transfer pricing is MOST important in evaluating:
a. Customer satisfaction
b. Division performance
c. Marketing strategy
d. Product design only

b. Manager performance evaluation

Decentralization improves:
a. Central control only
b. Manager performance evaluation
c. Tax reporting
d. Product pricing externally

d. Depends on capacity and opportunity cost

A transfer price should generally be set equal to:
a. External selling price always
b. Variable cost only always
c. Market price only always
d. Depends on capacity and opportunity cost

b. Opportunity cost

When a division is operating at full capacity, transfer price should include:
a. Only fixed cost
b. Opportunity cost
c. No cost at all
d. Only marketing cost

a. Negotiation or cost-based methods

When there is no external market, transfer price is usually based on:
a. Negotiation or cost-based methods
b. Stock price
c. Random pricing
d. Government control only

b. No incentive to control costs

A problem with cost-based transfer pricing is:
a. Too simple
b. No incentive to control costs
c. Always accurate
d. No effect on divisions

b. Divisions agree through negotiation

Transfer price could be any amount when:
a. There is strict regulation
b. Divisions agree through negotiation
c. No accounting system exists
d. External customers exist

b. External market selling price

A market-based transfer price is generally based on:
a. Internal accounting cost
b. External market selling price
c. Fixed overhead
d. Random estimation

b. Decentralized organizations

Transfer pricing is MOST used in:
a. Centralized organizations
b. Decentralized organizations
c. Government auditing only
d. External auditing only

c. Profit allocation between divisions

The key issue in transfer pricing is:
a. Color of product
b. Inventory storage
c. Profit allocation between divisions
d. Advertising strategy

c. Align division goals with company goals

A good transfer pricing system should:
a. Favor only selling division
b. Create conflict between divisions
c. Align division goals with company goals
d. Ignore opportunity cost

b. Lose motivation

If transfer price is too low, the selling division will:
a. Gain higher profit
b. Lose motivation
c. Increase external sales
d. Ignore cost control