transfer pricing

Question 1

What is transfer price?

Answer 1

The price charged when one division provides goods/services to another within the same company.

Question 2

Why is transfer pricing important?

Answer 2

Affects division profits, motivates internal cooperation, and aligns divisional and company goals.

Question 3

What are the three common approaches to setting transfer prices?

Answer 3

1. Negotiated Transfer Prices, 2. Transfers at Cost, 3. Transfers at Market Price.

Question 4

What is a negotiated transfer price?

Answer 4

A price agreed upon by selling and purchasing divisions, maintaining divisional autonomy.

Question 5

What is the range for negotiated transfer prices?

Answer 5

Lower limit: Selling division’s variable cost. Upper limit: External supplier cost or buyer’s willingness.

Question 6

What are the advantages of negotiated transfer prices?

Answer 6

Maintains divisional autonomy, aligns goals, and leverages managers’ insights on costs.

Question 7

What are the challenges of negotiated transfer prices?

Answer 7

May lead to lengthy negotiations and suboptimal decisions.

Question 8

What is transfer at cost?

Answer 8

Setting price at variable cost or full absorption cost, including fixed costs.

Question 9

What is a key challenge of transfer at cost?

Answer 9

Fails to incentivize cost control and may show no profit for selling divisions.

Question 10

What is transfer at market price?

Answer 10

Transfer price based on the external market price, aligning with competitive forces.

Question 11

What is the range of acceptable transfer prices with idle capacity?

Answer 11

Lower: Variable cost. Upper: External supplier price.

Question 12

What is the range of acceptable transfer prices with no idle capacity?

Answer 12

Lower: Variable cost + opportunity cost. Upper: External supplier price.

Question 13

What is the range of acceptable transfer prices with partial idle capacity?

Answer 13

Lower: Variable cost + average opportunity cost. Upper: External supplier price.

Question 14

What is the transfer price when no external supplier exists?

Answer 14

Maximum price based on the purchasing division’s profit margin.

Question 15

What are the principles of divisional autonomy?

Answer 15

Managers make independent decisions while aligning with company objectives.

Question 16

What are the key objectives of transfer pricing?

Answer 16

Motivate divisional managers, provide a fair basis for evaluation, and align divisional goals.

Question 17

What are common methods of transfer pricing?

Answer 17

1. Negotiated prices, 2. Cost-based prices, 3. Market prices.

Question 18

What is a practical application of transfer pricing?

Answer 18

Ensures resource optimization, accurate evaluation, and divisional goal alignment.

Question 19

What should you prepare for in transfer pricing exam questions?

Answer 19

Calculate transfer price ranges, analyze scenarios, and evaluate pricing methods’ impacts on profits.

Question 20

What is an example of transfer pricing with idle capacity?

Answer 20

Price = Variable cost, e.g., $8 for Cumberland Beverages.

Question 21

selling division with idle capacity. transfer pricing

Answer 21

transfer price >= variable cost per unit

Question 22

selling division with no idle capacity

Answer 22

transfer price >= Variable cost per unit + total CM on lost sales/number of units transferred

Question 23

selling division with some idle capacity

Answer 23

transfer price >= Variable cost per unit + Total CM on lost sales/number of units transferred

Question 24

negotiated transfer prices approach. range

Answer 24

○ Range:
Lower limit: Selling division’s variable cost + opportunity cost.
Upper limit: Cost of purchasing from an external supplier or the max the purchasing division is willing to pay.

Question 25

trasnfers at cost approach to transfer prices. key rule

Answer 25

○ Set at Variable Cost or Full Absorption Cost:
§ Variable Cost: Includes costs directly associated with producing the transferred good.
§ Full Absorption Cost: Includes both variable and allocated fixed costs.

Question 26

transfer at market price approach to transfer prices, key rule

Answer 26

○ Based on Open Market Prices:
§ Works well when the product/service has an external market.
§ Encourages alignment with external competitive forces.

Question 27

range of acceptable transfer prices, lower limit

Answer 27

Range of Acceptable Transfer Prices
* Lower Limit (Selling Division):
○ With Idle Capacity: Variable cost per unit.
○ Without Idle Capacity: Variable cost + opportunity cost of lost sales.

Question 28

range of acceptable transfer prices, upper limit

Answer 28

• Upper Limit (Purchasing Division):
  ○ With External Supplier: Cost of purchasing externally.
  ○ Without External Supplier: Maximum price the purchasing division is willing to pay based on its profitability.