Question : Objective 22.4 1) Transferring products or services at market prices generally : 1217118

Objective 22.4

1) Transferring products or services at market prices generally leads to optimal decisions when:

A) the market for the intermediate product is perfectly competitive

B) the interdependencies of the subunits are minimal

C) there are no additional costs or benefits to the company in buying or selling in the external market

D) All of these answers are correct.

2) A benefit of using a market-based transfer price is the:

A) profits of the transferring division are sacrificed for the overall good of the corporation

B) profits of the division receiving the products are sacrificed for the overall good of the corporation

C) economic viability and profitability of each division can be evaluated individually

D) None of these answers is correct.

3) When an industry has excess capacity, market prices may drop well below their historical average. If this drop is temporary, it is called:

A) distress prices

B) dropped prices

C) low-average prices

D) substitute prices

4) Cost-based transfer prices are helpful when:

A) a market exists for the product

B) a price is easy to obtain

C) the product is unique

D) All of these answers are correct.

5) Briefly describe the conditions that should be met for market-based transfer pricing to lead to optimal decision making among subunits of a large organization.

Objective 22.5

1) Optimal corporate decisions do NOT result when goods or services are transferred at:

A) market prices

B) full-cost prices

C) variable-cost prices

D) Either B or C is correct.

2) When companies do NOT want to use market prices or find it too costly, they typically use ________ prices, even though suboptimal decisions may occur.

A) average-cost

B) full-cost

C) long-run cost

D) short-run average cost

3) Crush Company makes internal transfers at 180% of full cost. The Soda Refining Division purchases 30,000 containers of carbonated water per day, on average, from a local supplier, who delivers the water for $30 per container via an external shipper. To reduce costs, the company located an independent supplier in Missouri who is willing to sell 30,000 containers at $20 each, delivered to Crush Company’s Shipping Division in Missouri. The company’s Shipping Division in Missouri has excess capacity and can ship the 30,000 containers at a variable cost of $2.50 per container. What is the total cost to Crush Company if the carbonated water is purchased from the local supplier?

A) $ 900,000

B) $1,200,000

C) $1,501,000

D) $1,620,000

4) Crush Company makes internal transfers at 160% of full cost. The Soda Refining Division purchases 40,000 containers of carbonated water per day, on average, from a local supplier, who delivers the water for $40 per container via an external shipper. To reduce costs, the company located an independent supplier in Illinois who is willing to sell 40,000 containers at $30 each, delivered to Crush Company’s Shipping Division in Missouri. The company’s Shipping Division in Missouri has excess capacity and can ship the 40,000 containers at a variable cost of $4.50 per container. What is the total cost of purchasing the water from the Illinois supplier and shipping it to the Soda Division?

A) $1,200,000

B) $1,380,000

C) $1,600,000

D) $180,000