TRUE OR FALSE

1. Transfer prices can be used to promote goal congruence among operating segments of an
organization.
2. 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.
3. 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.
4. 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.
5. One of the main factors to consider when using a cost-based transfer price is whether to use actual
or standard costs.
6. When using a negotiated transfer price, a decision must be made which market price to use.
7. When using a market-based transfer price, a decision must be made which market price to use.
8. When using a market-based transfer price, a decision must be made how price disputes will be
handled.
9. When using a negotiated transfer price, a determination must be made if comparable substitutes
are available externally.
10. Market based transfer prices are most effective for common high-cost and high-volume
standardized services.
11. Cost-based transfer prices are most effective for common high-cost and high-volume standardized
services.
12. Negotiated transfer prices are most appropriate customized high-volume and high-cost services.
13. Market based transfer prices are most appropriate customized high-volume and high-cost
services.
14. Cost based transfer prices are most appropriate for low cost and low volume services.
15. Negotiated transfer prices are most appropriate for low cost and low volume services.
16. An advance pricing agreement can eliminate the possibility of double taxation on multinational
exchanges of goods.

MULTIPLE CHOICE THEORIES

1. A major benefit of cost-based transfers is that

a. it is easy to agree on a definition of cost.
b. costs can be measured accurately.
c. opportunity costs can be included.
d. they provide incentives to control costs.
2. An internal reconciliation account is not required for internal transfers based on
a. market value.
b. dual prices.
c. negotiated prices.
d. cost.

3. The most valid reason for using something other than a full-cost-based transfer price between units of a
company is because a full-cost price
a. is typically more costly to implement.
 b. does not ensure the control of costs of a supplying unit.
c. is not available unless market-based prices are available.
d. does not reflect the excess capacity of the supplying unit.

4. To avoid waste and maximize efficiency when transferring products among divisions in a competitive
economy, a large diversified corporation should base transfer prices on
a. variable cost.
b. market price.
c. full cost.
d. production cost.
5.A transfer pricing system is also known as
a. investment center accounting.
b. a revenue allocation system.
c. responsibility accounting.
d. a charge-back system.

6. The maximum of the transfer price negotiation range is

a. determined by the buying division.
b. set by the selling division.
c. influenced only by internal cost factors.
d. negotiated by the buying and selling division.
7.The presence of idle capacity in the selling division may increase
a. the incremental costs of production in the selling division.
b. the market price for the good.
c. the price that a buying division is willing to pay on an internal transfer.
d. a negotiated transfer price.
8.Which of the following is a consistently desirable characteristic in a transfer pricing system?
a. system is very complex to be the most fair to the buying and selling units
b. effect on subunit performance measures is not easily determined
c. system should reflect organizational goals
d. transfer price remains constant for a period of at least two years
9.With two autonomous division managers, the price of goods transferred between the divisions needs to be
approved by
a. corporate management.
b. both divisional managers.
c. both divisional managers and corporate management.
d. corporate management and the manager of the buying division.
10. The minimum potential transfer price is determined by
a. incremental costs in the selling division.
b. the lowest outside price for the good.
c. the extent of idle capacity in the buying division.
d. negotiations between the buying and selling division.

11. As the internal transfer price is increased,

a. overall corporate profits increase.
b. profits in the buying division increase.
c. profits in the selling division increase.
 d. profits in the selling division and the overall corporation increase.
12. In an internal transfer, the selling division records the event by crediting
a. accounts receivable and CGS.
b. CGS and finished goods.
c. finished goods and accounts receivable.
d. finished goods and intracompany sales.

13. An internal transfer, the buying division records the transaction by

a. debiting accounts receivable.
b. crediting accounts payable.
c. debiting intracompany CGS.
d. crediting inventory.

14. Top management can preserve the autonomy of division managers and encourage an optimal level of
internal transactions by
a. selecting performance evaluation measures that are consistent with the achievement of
overall corporate goals.
b. selecting division managers who are most concerned about their individual performance.
c. prescribing transfer prices between segments.
d. setting up all organizational units as revenue centers.
15. To evaluate the performance of individual departments, interdepartmental transfers of a product should
preferably be made at prices
a. equal to the market price of the product.
b. set by the receiving department.
c. equal to fully-allocated costs of the producing department.
d. equal to variable costs to the producing department.

16. External factors considered in setting transfer prices in multinational firms typically do not include
a. the corporate income tax rates in host countries of foreign subsidiaries.
b. foreign monetary exchange risks.
c. environmental policies of the host countries of foreign subsidiaries.
d. actions of competitors of foreign subsidiaries.

17. The amounts charged for goods and services exchanged between two divisions are known as:
A. opportunity costs.
B. transfer prices.
C. standard variable costs.
D. residual prices.
E. target prices.

18. Nevada, Inc., has two divisions, one located in Las Vegas and the other located in Reno. Las
Vegas sells selected goods to Reno for use in various end-products. Assuming that the transfer
prices set by Las Vegas do not influence the decisions made by the two divisions, which of the
following correctly describes the impact of the transfer prices on divisional profits and overall
company profit?
Las Vegas Reno Profit Nevada
Profit Profit
A. Affected Affected Affected
 B. Affected Affected Not affected
C. Affected Not Affected
affected
D. Not affected Not Affected
affected
E. Not affected Not Not affected
affected

19. Thurmond, Inc., has two divisions, one located in New York and the other located in
Arizona. New York sells a specialized circuit to Arizona and just recently raised the circuit’s
transfer price. This price hike had no effect on the volume of circuits transferred nor on
Arizona’s option of acquiring the circuit from either New York or from an external supplier. On
the basis of this information, which of the following statements is most correct?
A. The profit reported by New York will increase and the profit reported by
Arizona will decrease.
B. The profit reported by New York will increase, the profit reported by Arizona
will decrease, and Thurmond’s profit will be unaffected.
C. The profit reported by New York will decrease, the profit reported by Arizona
will increase, and Thurmond’s profit will be unaffected.
D. The profit reported by New York will increase and the profit reported by
Arizona will increase.
E. The profit reported by New York and the profit reported by Arizona will be
unaffected.

20. Which of the following describes the goal that should be pursued when setting transfer
prices?
A.Maximize profits of the buying division.
B.Maximize profits of the selling division.
C.Allow top management to become actively involved when calculating the proper
dollar amounts.
D. Establish incentives for autonomous division managers to make decisions that are in
the overall organization's best interests (i.e., goal congruence).
E. Minimize opportunity costs.

21. A general calculation method for transfer prices that achieves goal congruence begins with
the additional outlay cost per unit incurred because goods are transformed and then
A. adds the opportunity cost per unit to the organization because of the transfer.
B. subtracts the opportunity cost per unit to the organization because of the transfer.
C. adds the sunk cost per unit to the organization because of the transfer.
D. subtracts the sunk cost per unit to the organization because of the transfer.
E. adds the sales revenue per unit to the organization because of the transfer.

22. Suddath Corporation has no excess capacity. If the firm desires to implement the general
transfer-pricing rule, opportunity cost would be equal to:
A. zero.
B. the direct expenses incurred in producing the goods.
C. the total difference in the cost of production between two divisions.
D. the contribution margin forgone from the lost external sale.
 E. the summation of variable cost plus fixed cost.

23. Tulsa Corporation has excess capacity. If the firm desires to implement the general transfer-
pricing rule, opportunity cost would be equal to:
A. zero.
B. the direct expenses incurred in producing the goods.
C. the total difference in the cost of production between two divisions.
D. the contribution margin forgone from the lost external sale.
E. the summation of variable cost plus fixed cost.

24. Transfer prices can be based on:

A. variable cost.
B. full cost.
C. an external market price.
D. a negotiated settlement between the buying and selling divisions.
E. all of the above.

25. Which of the following transfer-pricing methods can lead to dysfunctional decision-making
behavior by managers?
A. Variable cost.
B. Full cost.
C. External market price.
D. A professionally negotiated, amicable settlement between the buying and selling
divisions.
E. None of the above.

26. Consider the following statements about transfer pricing:

I. Income taxes and import duties are an important consideration when setting a
transfer price for companies that pursue international commerce.
II. Transfer prices cannot be used by organizations in the service industry.
III. Transfer prices are totally cost-based in nature, not market-based.

Which of the above statements is (are) true?

A. I only.
B. II only.
C. I and II.
D. II and III.
E. I, II, and III.