When a buying division purchases from outside supplier because the minimum transfer price is higher than their maximum transfer price, there is suboptimization, as the entire company could have benefited if the internal transfer occurs. True or False

When a buying division purchases from outside supplier because the minimum transfer price is higher than their maximum transfer price, there is suboptimization, as the entire company could have benefited if the internal transfer occurs. True or False

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter10: Decentralization: Responsibility Accounting, Performance Evaluation, And Transfer Pricing

Section: Chapter Questions

Problem 12DQ: If the minimum transfer price of the selling division is less than the maximum transfer price of the...

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Morrisons Plastics Division, a profit center, sells its products to external customers as well as to other internal profit centers. Which one of the following circumstances would justify the Plastics Division selling a product internally to another profit center at a price that is below the market-based transfer price? a. The buying unit has excess capacity. b. The selling unit is operating at full capacity. c. Routine sales commissions and collection costs would be avoided. d. The profit centers managers are evaluated on the basis of unit operating income.
Management of Great Springs Bottled Water Company has asked you, the controller, to develop a transfer pricing system for the company. The Transportation Department of the company sells all of its product to the Bottling Department of the company. Thus the Transportation Departments sales become the Bottling Departments cost of goods sold. In order to determine an optimal transfer pricing system, management would like you to demonstrate what an income statement would look like under a cost, market, and negotiated transfer pricing structure. These various transfer prices are listed as follows. Prepare an income statement for each of the transfer prices by filling in the missing numbers in the provided income statement based on each transfer price (thus four different income statements) and calculate the operating income/loss percentage. Prepare a brief summary of the results.
A transfer pricing arrangement that uses the price that would be charged to an external customer is a______. A. market-based approach B. negotiated approach C. cost approach D. decentralized approach
A transfer pricing structure that considers the opportunity costs of selling to internal rather than external customers uses_______. A. the cost approach B. the general transfer pricing approach C. the market-based approach D. the opportunity cost approach
Management of Green Peak Tea Company has asked you, the controller, to develop a transfer pricing system for the company. The Brewing Department of the company sells all of its product to the Bottling Department of the company. Thus the Brewing Departments sales become the Bottling Departments cost of goods sold. In order to determine an optimal transfer pricing system, management would like you to demonstrate what an income statement would look like under a cost, market, and negotiated transfer pricing structure. These various transfer prices are listed as follows. Prepare an income statement for each of the transfer prices by filling in the missing numbers in the provided income statement based on each transfer price (thus four different income statements) and calculate the operating income/loss percentage. Prepare a brief summary of the results.
Market-based transfer prices are best for the buying division. the company when the selling division is operating below capacity. the company when the selling division is operating at capacity. the buying division if it is operating at capacity.
Many organizations use transfer pricing when transferring products between different divisions of the same organisation. Critically discuss the advantages and disadvantages of the method: Negociated transfer price. Note: Define, explain gives examples and advantages and disadvantages
ANSWER TRUE OR FALSE Transfer prices can be used to promote goal congruence among operating segments of an organization. In computing a transfer price, the maximum price should be no higher than the lowest market price at which the buying segment can obtain the good or service externally. In computing a transfer price, the maximum price should be no higher than the highest market price at which the buying segment can obtain the good or service externally. In computing a transfer price, the minimum price should be no lower than the incremental costs associated with the goods plus the opportunity cost of the facilities used. One of the main factors to consider when using a cost-based transfer price is whether to use actual or standard costs. When using a negotiated transfer price, a decision must be made which market price to use. When using a market-based transfer price, a decision must be made which market price to use. When using a market-based transfer…
A benefit of using a market-based transfer price is: a. the economic viability and profitability of each division can be evaluated individually. b. the profits of the transferring division are sacrificed for the overall good of the corporation. c. the profits of the division receiving the products are sacrificed for the overall good of the corporation. d. none of the abovee
Calculate the lowest acceptable transfer price for the seller (Division A) ?
The three common approaches to setting transfer prices include: the _____ price approach, where the transfer price is the price at which the product or service transferred could be sold to outside buyers; the _____ price approach allows the managers to agree among themselves on a transfer price; and the _____ price approach, where cost is used to set transfer prices. cost; market; negotiated market; cost; negotiated market; negotiated; cost negotiated; market; cost none of the above
Many organizations use transfer pricing when transferring products between different divisions of the same organisation. Critically discuss the advantages and disadvantages of the method: Market based transfer price. Note: Define, explain gives examples and advantages and disadvantages