Managerial Accounting 2nd Edition By AGE Ray Garrison Eric Noreen Peter Brewer – Test Bank

True / False Questions

1. When a dispute arises over a transfer price, top managers should intervene to keep divisional managers from making a costly mistake, even though the divisions are evaluated as profit centers.
   FALSE

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 5
Level: Medium

2. One advantage of using actual cost incurred as the transfer price is that it provides a strong incentive for the producing division to control its costs.
   FALSE

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 5
Level: Medium

3. A division of a company has idle capacity and produces a part that has a variable cost of $52 per unit and a full (absorption) cost of $87. Another division of the same company uses such a part in one of its products and it can buy an identical part from an outside supplier for $81 per unit. The company will be worse off if the latter division decides to buy exclusively from the outside supplier than if the part is made inside the company and transferred from one division to the other.
   TRUE

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 5
Level: Medium

Multiple Choice Questions

4. Managers sometimes do not act in ways that are in the best interests of the overall company. What is the term for this?
   A.Strategic approach
   B. Suboptimization
   C. Optimal motivation
   D. Responsibility accounting

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 5
Level: Easy

5. Division X makes a part that it sells to customers outside of the company. Data concerning this part appear below:Selling price to outside customers $50
   Variable cost per unit $30
   Total fixed costs $400,000
   Capacity in units 25,000Division Y of the same company would like to use the part manufactured by Division X in one of its products. Division Y currently purchases a similar part made by an outside company for $49 per unit and would substitute the part made by Division X. Division Y requires 5,000 units of the part each period. Division X can sell all of the units it makes to outside customers. What is the lowest acceptable transfer price from the standpoint of the selling division?
   A.$50
   B. $49
   C. $46
   D. $30

(Note: Due limitations in fonts and word processing software, > and < signs must be used in this solution rather than “greater than or equal to” and “less than or equal to” signs.)
From the perspective of the selling division, profits would increase as a result of the transfer if and only if:
Transfer price > Variable cost + Opportunity cost
The opportunity cost is the contribution margin on the lost sales, divided by the number of units transferred:
Opportunity cost = [($50 – $30) x 5,000]  5,000 = $20
Therefore, Transfer price > $30 + $20 = $50.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 5
Level: Medium

6. Division X of Charter Corporation makes and sells a single product which is used by manufacturers of fork lift trucks. Presently it sells 12,000 units per year to outside customers at $24 per unit. The annual capacity is 20,000 units and the variable cost to make each unit is $16. Division Y of Charter Corporation would like to buy 10,000 units a year from Division X to use in its products. There would be no cost savings from transferring the units within the company rather than selling them on the outside market. What should be the lowest acceptable transfer price from the perspective of Division X?
   A.$24.00
   B. $21.40
   C. $17.60
   D. $16.00

(Note: Due limitations in fonts and word processing software, > and < signs must be used in this solution rather than “greater than or equal to” and “less than or equal to” signs.)
From the perspective of the selling division, profits would increase as a result of the transfer if and only if:
Transfer price > Variable cost + Opportunity cost
The opportunity cost is the contribution margin on the lost sales, divided by the number of units transferred:
Opportunity cost = [($24 – $16) x 2,000*]  10,000 = $1.60
* 10,000 – (20,000 – 12,000) = 2,000
Therefore, Transfer price > $16 + $1.60 = $17.60.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 5
Level: Hard

7. Division A of Harkin Company has the capacity for making 3,000 motors per month and regularly sells 1,950 motors each month to outside customers at a contribution margin of $62 per motor. The variable cost per motor is $35.70. Division B of Harkin Company would like to obtain 1,400 motors each month from Division A. What should be the lowest acceptable transfer price from the perspective of Division A?
   A.$26.57
   B. $51.20
   C. $35.70
   D. $62.00

(Note: Due limitations in fonts and word processing software, > and < signs must be used in this solution rather than “greater than or equal to” and “less than or equal to” signs.)
From the perspective of the selling division, profits would increase as a result of the transfer if and only if:
Transfer price > Variable cost per unit + Opportunity cost
The opportunity cost is the contribution margin on the lost sales, divided by the number of units transferred:
Opportunity cost = [$62 x 350*]  1,400 = $15.50
* 1,400 – (3,000 – 1,950) = 350
Therefore, Transfer price > $35.70 + $15.50 = $51.20.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 5
Level: Hard

8. Part WY4 costs the Eastern Division of Tyble Corporation $26 to make-direct materials are $10, direct labor is $4, variable manufacturing overhead is $9, and fixed manufacturing overhead is $3. The Eastern Division can sell all of Part WY4 they can make to other companies for $30. The Western Division of Tyble Corporation can use Part WY4 in one of its products. What is the lowest transfer price at which the Eastern Division would be willing to sell Part WY4 to the Central Division?
   A.$30
   B. $26
   C. $23
   D. $27

(Note: Due limitations in fonts and word processing software, > and < signs must be used in this solution rather than “greater than or equal to” and “less than or equal to” signs.)
From the perspective of the selling division, profits would increase as a result of the transfer if and only if:
Transfer price > Variable cost + Opportunity cost
The opportunity cost is the contribution margin on the lost sales, divided by the number of units transferred:
Opportunity cost = $30 – $10 – $4 – $9 = $7 each
Therefore, Transfer price > $23 + $7 = $30.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 5
Level: Easy

Division A makes a part with the following characteristics:

Division B, another division of the same company, would like to purchase 5,000 units of the part each period from Division A. Division B is now purchasing these parts from an outside supplier at a price of $24 each.

9. Suppose that Division A has ample idle capacity to handle all of Division B’s needs without any increase in fixed costs and without cutting into sales to outside customers. If Division B continues to purchase parts from an outside supplier rather than from Division A, the company as a whole will be:
   A.worse off by $30,000 each period.
   B. worse off by $10,000 each period.
   C. better off by $15,000 each period.
   D. worse off by $35,000 each period.

Purchasing from outside supplier costs $6 more than producing internally would ($24 – $18). The total for all 5,000 parts is $6 x 5,000 = $30,000. Therefore, if the company continues to purchase from the outside supplier, it will be $30,000 worse off.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 5
Level: Medium

10. Suppose that Division A is operating at capacity and can sell all of its output to outside customers at its usual selling price. If Division A sells the parts to Division B at $24 per unit (Division B’s outside price), the company as a whole will be:
    A.better off by $5,000 each period.
    B. worse off by $15,000 each period.
    C. worse off by $5,000 each period.
    D. There will be no change in the status of the company as a whole.

Since the company’s selling the units currently for $25, if they sell internally for $24, they will be worse off by $1 per unit, or $5,000 in total ($1 x 5,000).