Question : 5) An advantage of using budgeted costs for transfer pricing : 1217119

5) An advantage of using budgeted costs for transfer pricing among divisions is that:

A) overall corporate profitability is usually higher

B) it usually provides a basis for optimal decision making

C) the divisions know the transfer price in advance

D) it promotes subunit autonomy

6) The transfer-pricing method that reduces the goal-congruence problems associated with a pure cost-plus-based transfer-pricing method is:

A) dual pricing

B) market pricing

C) single pricing

D) Both A and B are correct.

7) Dual pricing is NOT widely used in practice because:

A) the manager of the supplying division does not have sufficient incentive to control costs

B) it increases goal congruence

C) managers are not insulated from the frictions of the market place

D) Both B and C are correct.

8) Cost based transfer prices are the only price that a firm should use when transferring goods from one subunit to another subunit.

9) A major advantage of using actual costs for transfer prices is that often inefficiencies are NOT passed along to the receiving division.

10) Dual pricing reduces the goal-congruence problem associated with a pure cost-based transfer-pricing method.

11) Cost-based transfer pricing is a better method when the products being transferred are specialized in nature.

12) A firm using a cost-based transfer price will never have the selling division be able to achieve goal congruence.

13) Sportswear Company manufactures sneakers. The Athletic Division sells its socks for $18 a pair to outsiders. Sneakers have manufacturing costs of $7.50 each for variable and $4.50 for fixed. The division’s total fixed manufacturing costs are $315,000 at the normal volume of 70,000 units.

The European Division has offered to buy 15,000 Sneakers at the full cost of $12. The Athletic Division has excess capacity and the 15,000 units can be produced without interfering with the current outside sales of 70,000. The 85,000 volume is within the division’s relevant operating range.

Explain whether the Athletic Division should accept the offer.

14) Xenon Autocar Company manufactures automobiles. The Fastback Car Division sells its cars for $50,000 each to the general public. The fastback cars have manufacturing costs of $25,000 each for variable and $15,000 each for fixed costs. The division’s total fixed manufacturing costs are $75,000,000 at the normal volume of 5,000 units.

The Coupe Car Division has been unable to meet the demand for its cars this year. It has offered to buy 1,000 cars from the Fastback Car Division at the full cost of $40,000. The Fastback Car Division has excess capacity and the 1,000 units can be produced without interfering with the current outside sales of 5,000. The 6,000 volume is within the division’s relevant operating range.

Explain whether the Fastback Car Division should accept the offer.