Unit 12: Transfer Pricing - Practice Quiz

DEACC506 60 Questions
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1 What is meant by transfer price?

Meaning and Importance Easy
A. The price charged for goods or services transferred between divisions of the same organisation
B. The price charged to external customers in the open market
C. The price fixed by the government for essential goods
D. The price paid to import goods from a foreign country

2 Transfer pricing is most relevant for organisations that are:

Meaning and Importance Easy
A. Purely charitable in nature
B. Operating without any departments
C. Divisionalised or decentralised
D. Owned by a single proprietor

3 In transfer pricing, the division that supplies goods is called the:

Meaning and Importance Easy
A. Purchasing division
B. Selling (transferring) division
C. External customer
D. Holding company

4 The division that receives goods in a transfer pricing transaction is known as the:

Meaning and Importance Easy
A. Parent division
B. Buying (receiving) division
C. Selling division
D. Distributing division

5 Which of the following best describes the importance of transfer pricing?

Meaning and Importance Easy
A. It replaces the role of external auditors
B. It removes the need for cost accounting
C. It eliminates the need for financial statements
D. It helps measure the performance of individual divisions

6 Transfer pricing primarily affects the reported ____ of individual divisions.

Meaning and Importance Easy
A. Number of employees
B. Market share
C. Share capital
D. Profit

7 A good transfer pricing system should promote:

Meaning and Importance Easy
A. Higher external tax liability
B. Conflict among divisional managers
C. Reduction in overall production
D. Goal congruence between divisions and the organisation

8 Which of the following is an advantage of transfer pricing?

Advantages and Limitations Easy
A. It always reduces total company profit
B. It prevents any internal transactions
C. It enables divisional performance evaluation
D. It eliminates divisional autonomy

9 Transfer pricing supports which management practice by allowing divisions to operate independently?

Advantages and Limitations Easy
A. Decentralisation
B. Nationalisation
C. Standardisation of prices only
D. Centralisation of all decisions

10 Which of the following is a limitation of transfer pricing?

Advantages and Limitations Easy
A. It always increases market competition
B. It guarantees maximum profit for all divisions
C. It may cause disputes between divisional managers
D. It removes the need for performance measurement

11 A poorly set transfer price can lead to:

Advantages and Limitations Easy
A. Elimination of all divisional costs
B. Perfect goal congruence
C. Sub-optimal decisions for the organisation
D. Higher external sales automatically

12 Transfer pricing can help a division be treated as a separate:

Advantages and Limitations Easy
A. Profit centre
B. Charity organisation
C. Government department
D. External supplier only

13 Which of the following is a common problem with transfer pricing?

Advantages and Limitations Easy
A. Complete absence of internal transactions
B. No effect on divisional profit
C. Automatic agreement between all divisions
D. Difficulty in determining a fair price

14 Which of the following is a recognised method of setting a transfer price?

Methods of Calculating Transfer Price Easy
A. Market-based transfer price
B. Weather-based transfer price
C. Alphabet-based transfer price
D. Random-based transfer price

15 Under the cost-based transfer pricing method, the transfer price is based on the:

Methods of Calculating Transfer Price Easy
A. Age of the company
B. Salary of the manager
C. Number of divisions
D. Cost of producing the goods

16 In the market-based method, the transfer price is set equal to the:

Methods of Calculating Transfer Price Easy
A. External market price
B. Divisional manager's target
C. Total company profit
D. Historical cost of the asset

17 A transfer price arrived at through discussion between the buying and selling divisions is called a:

Methods of Calculating Transfer Price Easy
A. Statutory transfer price
B. Standard external price
C. Negotiated transfer price
D. Random transfer price

18 If a transfer price is set at full cost plus a markup, this is an example of:

Methods of Calculating Transfer Price Easy
A. Negotiated pricing
B. Marginal-only pricing
C. Cost-plus transfer pricing
D. Market-based pricing

19 A division produces a component at a marginal cost of per unit and transfers it at marginal cost. The transfer price is:

Methods of Calculating Transfer Price Easy
A.
B.
C.
D.

20 If the full cost is and a markup of is added, the cost-plus transfer price is:

Methods of Calculating Transfer Price Easy
A.
B.
C.
D.

21 A transfer price is best described as the price at which:

Meaning and Importance Medium
A. Goods or services are exchanged between divisions of the same organisation
B. Finished goods are sold to external customers in the open market
C. Shares of a subsidiary are transferred to the holding company
D. A company purchases raw materials from independent suppliers

22 The primary reason transfer pricing becomes important is the existence of:

Meaning and Importance Medium
A. Government-imposed maximum retail prices
B. External customers demanding price discounts
C. A single centralised department controlling all decisions
D. Decentralised divisions treated as separate profit or investment centres

23 In performance evaluation, a transfer price set too high will most likely:

Meaning and Importance Medium
A. Overstate the buying division's profit
B. Have no effect on either division's reported profit
C. Understate both divisions' profits equally
D. Overstate the selling division's profit and understate the buying division's profit

24 Which objective is a well-designed transfer pricing system intended to promote?

Meaning and Importance Medium
A. Reduction of statutory audit requirements
B. Maximisation of a single division's profit at the company's expense
C. Elimination of divisional autonomy
D. Goal congruence between divisional and overall organisational goals

25 Which of the following is an advantage of an effective transfer pricing system?

Advantages and Limitations Medium
A. It eliminates all inter-divisional conflict permanently
B. It enables fair evaluation of divisional performance
C. It guarantees zero tax liability for the group
D. It removes the need for divisional managers

26 A common limitation of transfer pricing systems is that they may:

Advantages and Limitations Medium
A. Lead to disputes and conflicts between divisions over the price
B. Make external sales impossible
C. Prevent divisions from being decentralised
D. Always reduce total organisational profit

27 Which statement about the effect of transfer pricing on divisional autonomy is correct?

Advantages and Limitations Medium
A. Autonomy is only affected by external market prices
B. Centrally imposed transfer prices can undermine divisional autonomy
C. Transfer prices always increase divisional autonomy
D. Transfer prices have no relationship to autonomy

28 For a multinational group, one key advantage of transfer pricing is the ability to:

Advantages and Limitations Medium
A. Shift profits toward jurisdictions with favourable tax rates
B. Eliminate currency exchange rate risk entirely
C. Avoid preparing consolidated financial statements
D. Remove the need for divisional cost records

29 A limitation of using cost-based transfer prices is that they:

Advantages and Limitations Medium
A. May pass on the supplying division's inefficiencies to the buyer
B. Always equal the external market price
C. Cannot be used for internal transfers
D. Are impossible to calculate in practice

30 Under the market-based transfer pricing method, the transfer price is set equal to the:

Methods of Calculating Transfer Price Medium
A. Average of all divisions' costs
B. Prevailing price of the product in the external market
C. Total fixed cost of the supplying division
D. Buying division's selling price to customers

31 A division has variable cost of per unit and there is no external market for the intermediate product. Using the marginal (variable) cost method with no spare capacity constraint, the transfer price would be:

Methods of Calculating Transfer Price Medium
A. Market price of the final product
B.
C.
D.

32 The general economic rule for the minimum transfer price the supplying division should accept is:

Methods of Calculating Transfer Price Medium
A. Marginal cost plus opportunity cost of the transfer
B. Total cost plus a standard mark-up
C. Fixed cost per unit only
D. The buying division's final selling price

33 Division A has spare capacity and variable cost of per unit. Since there is no lost external sale, the minimum transfer price it should accept is:

Methods of Calculating Transfer Price Medium
A. Zero
B. External market price
C.
D.

34 Under the cost-plus transfer pricing method, if the total cost per unit is and the mark-up is , the transfer price is:

Methods of Calculating Transfer Price Medium
A.
B.
C.
D.

35 The negotiated transfer pricing method involves setting the price through:

Methods of Calculating Transfer Price Medium
A. A fixed formula imposed by tax authorities
B. Bargaining and agreement between the two divisions involved
C. The lowest external supplier quote only
D. The average of all past year prices

36 Division X sells externally at per unit with variable cost . If it is operating at full capacity, the minimum transfer price to Division Y should be:

Methods of Calculating Transfer Price Medium
A.
B.
C.
D.

37 Which method is generally considered most appropriate when a competitive external market for the intermediate product exists?

Methods of Calculating Transfer Price Medium
A. Full-cost transfer pricing
B. Marginal-cost transfer pricing
C. Market-based transfer pricing
D. Negotiated transfer pricing

38 A drawback of the full-cost (total-cost) transfer pricing method for decision making is that it:

Methods of Calculating Transfer Price Medium
A. Ignores all production costs
B. Always understates the true cost of production
C. Is only usable when there is no internal transfer
D. Includes fixed costs that are irrelevant to short-run transfer decisions

39 Division P (variable cost , spare capacity) transfers to Division Q, which converts and sells the final product for incurring additional variable cost of . From the group's view, internal transfer is beneficial as long as exceeds:

Methods of Calculating Transfer Price Medium
A. only
B. (total variable cost of both divisions)
C. only
D.

40 The dual transfer pricing method is used mainly to:

Methods of Calculating Transfer Price Medium
A. Charge both divisions exactly the same market price
B. Credit the seller at one price while charging the buyer at another
C. Eliminate the need for any transfer price
D. Set the price using only external tax rules

41 Division A can sell its intermediate product externally at $100 per unit with variable cost of $60 and no capacity constraint. Division B needs the product internally. Under the general (opportunity cost) transfer pricing rule, what is the minimum transfer price A should charge when A is operating at full capacity?

Methods of Calculating Transfer Price Hard
A. $40 (contribution margin only)
B. $100 (market price)
C. $80 (variable cost plus half of margin)
D. $60 (variable cost)

42 Using the general rule, if Division A has spare capacity (no external sales lost) with variable cost of $60 and market price $100, the minimum acceptable transfer price to A is:

Methods of Calculating Transfer Price Hard
A. $100
B. $60
C. $80
D. $40

43 Division X (variable cost $30, market price $50) has spare capacity for 2,000 of the 5,000 units Division Y requires; the remaining 3,000 units must displace external sales. What is the correct weighted minimum total transfer price Y should pay for all 5,000 units?

Methods of Calculating Transfer Price Hard
A. $150,000
B. $210,000
C. $190,000
D. $250,000

44 A cost-plus transfer price based on full cost plus markup is widely criticised because it can:

Methods of Calculating Transfer Price Hard
A. Transfer inefficiencies of the selling division to the buyer and distort make-or-buy decisions
B. Eliminate all goal congruence problems automatically
C. Guarantee that the buying division reports higher profit
D. Always equal the arm's length price required by tax authorities

45 Division S has variable cost $40, fixed cost $20/unit, and no external market. Division B converts it and sells the final product for $110 with additional variable cost $30. If S transfers at full cost ($60), B reports a unit profit of:

Methods of Calculating Transfer Price Hard
A. $40
B. $50
C. $0
D. $20

46 Under a dual transfer pricing system, the selling division is typically credited at market/cost-plus price while the buying division is charged at variable cost. The main consequence is:

Methods of Calculating Transfer Price Hard
A. The sum of divisional profits exceeds actual company profit, requiring elimination on consolidation
B. The buying division always shows a loss on internal purchases
C. Both divisions are charged identical amounts eliminating any dispute
D. Company profit is overstated but divisional profits are correct

47 A perfectly competitive external market exists for an intermediate product. Theory recommends the transfer price be set at:

Methods of Calculating Transfer Price Hard
A. Marginal cost of the selling division
B. The buying division's net realisable value
C. Full cost plus a negotiated margin
D. Market price (possibly less avoidable selling costs on internal transfers)

48 Division P (variable cost $45) sells externally at $70. Division Q can buy the same input externally at $65. P has spare capacity. From the company's perspective, transfers should occur if:

Methods of Calculating Transfer Price Hard
A. P's market price $70 exceeds Q's external price $65
B. Q's external price $65 exceeds P's variable cost $45, so internal transfer saves cost
C. P's variable cost $45 exceeds Q's external price $65
D. Q's external price $65 is below P's market price $70 always

49 A negotiated transfer price is most likely to lead to a dysfunctional (non-goal-congruent) outcome when:

Methods of Calculating Transfer Price Hard
A. Both divisions have equal bargaining power and full cost information
B. Top management sets a clear range within which to negotiate
C. Negotiating strength is unequal and managers focus on divisional rather than corporate profit
D. A reliable external market price exists for reference

50 Division A's marginal cost function is and it transfers to Division B which faces final marginal revenue (with no external intermediate market). The optimal transfer quantity is where net marginal revenue equals A's marginal cost. If B has no further conversion cost, optimal is:

Methods of Calculating Transfer Price Hard
A. 24
B. 16
C. 12
D. 20

51 The two-part transfer pricing method charges the buyer variable cost per unit plus a periodic fixed fee. Its key advantage is that it:

Methods of Calculating Transfer Price Hard
A. Guarantees the arm's length standard for tax purposes
B. Motivates goal-congruent short-run decisions while letting the seller recover fixed costs and profit
C. Eliminates the seller's incentive to control variable costs
D. Removes the need for any consolidation adjustments

52 A key limitation of using market-based transfer prices arises specifically when:

Advantages and Limitations Hard
A. The intermediate product is identical to a widely traded commodity
B. The external market is imperfect, prices are volatile, or the intermediate product has no market
C. The company operates in a single tax jurisdiction
D. Both divisions are evaluated as investment centres

53 Which statement best captures a trade-off in transfer pricing design?

Advantages and Limitations Hard
A. Negotiated prices are optimal for performance evaluation and taxation alike
B. A price that maximises divisional autonomy may conflict with company-wide goal congruence
C. Market prices remove all conflict between divisions and the firm
D. Cost-based prices always satisfy both autonomy and goal congruence

54 For a multinational, aggressive transfer pricing to shift profit to low-tax jurisdictions is limited primarily by:

Advantages and Limitations Hard
A. The impossibility of transferring intangibles across borders
B. Arm's length rules and anti-avoidance regulation requiring prices comparable to independent parties
C. A global ban on cost-plus methods
D. The requirement to use only marginal cost internally

55 Division A (capacity 10,000 units) sells 7,000 externally at $50 (variable cost $30). Division B wants 5,000 units. To satisfy B, A must sacrifice some external sales. The correct minimum transfer price for the entire 5,000-unit order is:

Methods of Calculating Transfer Price Hard
A. $190,000
B. $250,000
C. $150,000
D. $210,000

56 Transfer pricing is important chiefly because it simultaneously affects:

Meaning and Importance Hard
A. Only the consolidated revenue of the group
B. Divisional performance measurement, resource-allocation decisions, and reported taxable profit by location
C. Solely the external audit fee of the entity
D. Only the cash balance of the selling division

57 In a decentralised firm, a transfer price that is set too high by the supplying division is most likely to cause the buying division to:

Meaning and Importance Hard
A. Automatically achieve goal congruence
B. Report a higher profit than economically justified
C. Source externally even when internal supply is cheaper for the company as a whole
D. Increase internal purchase volume beyond optimal levels

58 Division C's variable cost is $25 and its market price is $40. Division D processes further at variable cost $35 and sells at $85. If C transfers at market price $40 while it has spare capacity, which division's decision could still be sub-optimal?

Methods of Calculating Transfer Price Hard
A. C, because it should refuse to transfer at $40
B. None — market price with spare capacity risks D rejecting profitable transfers only if the final margin turns negative, otherwise decisions remain optimal
C. Both divisions always report losses
D. D always, because $40 exceeds its own cost

59 Which combination correctly pairs a transfer pricing method with its main weakness?

Advantages and Limitations Hard
A. Negotiated — eliminates managerial time and disputes
B. Market price — always unavailable and never goal-congruent
C. Marginal cost — guarantees the seller earns a profit margin
D. Full cost plus — passes on fixed cost and inefficiency, distorting the buyer's marginal decisions

60 A group wants a transfer price that (i) motivates the buyer using true relevant cost and (ii) still lets the seller show a reasonable profit. The method that best achieves both without double-counting on consolidation issues being unmanageable is:

Methods of Calculating Transfer Price Hard
A. Two-part tariff (variable cost per unit plus a lump-sum fixed charge)
B. Marginal cost only
C. Market price only
D. Full cost only