Question : 23.3   Assess the market-based transfer price method. 1) When the intermediate : 1186211

23.3   Assess the market-based transfer price method.

1) When the intermediate market is perfectly competitive, interdependencies of subunits are minimal, and there are additional costs to the corporation as a whole in using the market instead of transacting internally.

2) When demand outstrips supply, market prices may drop below historical averages. These prices are known as distress prices.

3) Under distress pricing conditions, long run average prices may be used in setting transfer prices. Such actions negatively affect the supplying division.

4) Market-based transfer prices are ideal in perfectly competitive markets when there is idle capacity in the selling division.

5) A market is said to be perfectly-competitive when

A) there is no opportunity costs incurred by the vendor nor by the buyer.

B) the market may be dominated by one or two major companies, but there are many smaller companies also in the market.

C) there is a homogeneous product, equivalent buying and selling prices, and no individual buyers or sellers can affect those prices by their own actions.

D) there are any number of products, equivalent buying and selling prices, and individual buyers or sellers can affect those prices by their own actions.

E) there are any number of products, equivalent buying and selling prices, and individual buyers or sellers can affect those prices by their own actions, but there are no opportunity costs for buyers or sellers.

6) In a time of distress prices, which of the following is true?

A) The vendor division should set the transfer price at the distress price on a long-term basis for stability within the overall company.

B) The vendor division should cease production.

C) The purchasing division should pay normal prices.

D) In the short-term, the transfer price should be the distress price as long as this exceeds the incremental costs.

E) The distress price should be ignored as it is a function of the market, not of the internal capacities of the overall company.

7) When industry has excess capacity, market prices may drop sizably 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.

E) fire sale.

8) The objectives of setting transfer prices include

A) goal congruence.

B) maximizing the selling subunit’s income.

C) subunit autonomy.

D) minimizing the purchasing subunit’s costs.

E) goal congruence and subunit autonomy.

9) The Micro Division of Silicon Computers produces computer chips that are sold to the Personal Computer Division and to outsiders. Operating data for the Micro Division are as follows:

Internal SalesExternal Sales

Sales: 300,000 chips at $10$3,000,000

200,000 chips at $12 $2,400,000

Variable expenses at $41,200,000800,000

Contribution margin$1,800,000$1,600,000

Fixed cost (allocated on units)1,500,000 1,000,000

Operating income$300,000$600,000

The Personal Computer Division has just received an offer from an outside supplier to furnish chips at $8.60 each. The manager of Micro Division is not willing to meet the $8.60 price. She argues that it costs her $9.00 to produce and sell each chip. Sales to outside customers are at a maximum of 200,000 chips.

Required:

a.Verify the Micro Division’s $9.00 unit cost figure.

b.Should the Micro Division meet the outside price of $8.60? Explain.

c.Could the $8.60 price be met and still show a profit for the Micro Division sales to the Personal Computer Division? Show computations.