Ch4. Transfer Pricing

Question 1

Happens when two or more related companies transact with each other

e.g. parent and subsidiary, divisions or affiliates selling or buying from each other

Answer 1

Transfer Pricing

Question 2

is the price at which related parties transact with each other.

may be used in transactions between a company and its subsidiaries, or between divisions of the same company in the same or in different countries

Answer 2

transfer price

Question 3

types of transfer price

Answer 3

• market price
• cost -based transfer price
• negotiated transfer price
• arbitrary transfer pricing
• dual pricing

Question 4

the current price at which a product or services can be bought or sold

Answer 4

market price

Question 5

cost plus mark up

Answer 5

cost-based transfer price

Question 6

the best bargain price acceptable to the buying and selling units

Answer 6

negotiated transfer price

Question 7

set by management at the corporate headquaters

Answer 7

arbitrary transfer pricing

Question 8

a method where the transfer price is set at different levels for the supplying and receiving divisions of an organization

Answer 8

dual pricing

Question 9

General rules in choosing a transfer price

Answer 9

• minimum transfer price
• maximum transfer price

Question 10

should be no less than the sum of the selling segment’s incremental costs ( or marginal costs) associated with the goods or services plus the opportunity cost of the facilities used.

variable cost per unit* + lost contribution margin per unit on outside sales
*the incremental costs incurred when producing additional units of a good or service.

Answer 10

minimum transfer price

Question 11

should be no greater than the lowest market price at which the buying segment can acquire the goods or services externally.

Answer 11

maximum transfer price

Question 12

• applied when the transacting divisions are addressed or located in different countries of operations.
• special focus is the analysis on international tax effects incurred or paid by the parent or holding company to the host countries

Answer 12

multinational transfer pricing

Question 13

• the transfer price affects the profit that divisions makes
• the profit is often a key figure used when assessing the performance of a division. e.g. return on investment (roi) or residual income (ri) is used to measure performance

Answer 13

quality management measurement

Question 14

quality management measurement other measures:

Answer 14

• break-even time
• external nonfinancial measures
• internal nonfinancial measure

Question 15

the point at which total costs are equal to total revenue

Answer 15

break-even time

Question 16

customer satisfaction, sales returns, market share, competitive rank

Answer 16

external nonfinancial measures

Question 17

set up time, rework, new product development time, manufacturing cycle time, and productivity rate

Answer 17

internal nonfinancial measures

Question 18

three internal nonfinancial measures

Answer 18

new product development time, manufacturing cycle time, and productivity rate

Question 19

the period from conceptualization, design, approved and made ready for commercial productions

Answer 19

new product development time

Question 20

the period where materials from suppliers are received stocked, checked, processed and prepared for delivery to customers.

Answer 20

manufacturing cycle time

Question 21

a measured of output (finished goods) over the process input (materials, labor hours)

Answer 21

production rate