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Question 1
Division A of company is currently operating at 50% capacity. It produces a single product and sells all its production
to outside customers for P13 per unit. Variable costs are P7 per unit, and fixed costs are P6 per unit at the current
production level. Division B, which currently purchases this product fro man outside supplier for P12 per unit, would
like to purchase the product from Division A. Division A will operate at 80% capacity to meet outside customer’s and
Division B’s demand. What is the minimum price that Division A should charge Division B for this product?
 a. P12.00 per unit
 Selected: b. P7.00 per unit This answer is correct.
 c. P13.00 per unit
 d. P10.40 per unit
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Question 2
Division A has an expected annual production of 50,000 units and
fixed manufacturing costs of p300,000. The full absorption cost
per unit based on expected annual production is shown below:

Variable cost P 6.00

Fixed costs (P300,000 / 50 units) 6.00

Division A has idle capacity and Division B is considering buying

10,000 units from Division A to be processed further and to sell
at P21 per unit. Division B would incur additional processing costs
and selling costs of P6 and P5 per unit, respectively.

The contribution to profit per unit to Division B if the transfer

price is based on full absorption cost would be
 a. P2.00
 b. P8.00
 c. P4.00

 Selected: d. (P2.00) This answer is correct.

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Question 3
David Co. plans to sell 200 units using P20,000 of assets. The company incurs total costs of P8,000 for these units. If
a return on investment of 10 % is targeted, how much should be the selling price?
 a. P30
 Selected: b. P50 This answer is correct.
 c. P20
 d. Cannot be determined from given information
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Question 4
Overland Transport co. has two divisions, Parts Division (PD) and Equipment
Division (ED). Each division manager has full responsibility on all decisions
regarding sales to internal and external customers. ED has always acquired
a certain part from PD at negotiated price of P38 per unit. Due to peso
devaluation, PD informed ED that it has increased its transfer price to P45.
The new market price is P50 per unit.

An outside supplier offered to sell ED the same part at P40 per unit and
the management of ED is considering accepting the offer. The Parts division
provided the following data:
 ED’s annual parts requirements 5,000 units
PD’s variable cost per unit P 35.00
PD’s fixed cost per unit P 10.00

Parts division will have idle capacity if ED decides to buy from the
outside supplier.

The total advantage (disadvantage) to ED’s profit if it decided to buy

from outside supplier instead of accepting PD’s transfer price is
 a. P50,000
 b. (P25,000)
 c. None
 Selected: d. P25,000
This answer is correct.
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Question 5
The AAA Division of a company, which is operating at capacity,
produces and sells 1,000 units of a certain electronic
component in a perfectly competitive market. Revenue and cost
data are as follows:

Sales P 50,000
Variable costs 34,000
Fixed costs 12,000

The minimum transfer price that should be charged to the BBB

Division of the same company for each component is
 Selected: a. P50.00 This answer is correct.
 b. P46.00
 c. P34.00
 d. P12.00
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Question 6
A management decision may be beneficial for a given profit center but not for the entire company. From the over-all
company viewpoint, this decision leads to
 Selected: a. Sub-optimization This answer is correct.
 b. Maximization
 c. Goal congruence
 d. Centralization
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Question 7
Electro Company operates a Component Division (CD) and Finished
Product Division (FPD). CD’s annual data is shown below:

Sale – external market (40,000 units X P15) P 600,000

Variable costs 400,000
Contribution Margin P 200,000
Fixed costs 100,000
Gross Margin P 100,000

The normal operating capacity of CD is 50,000 units. FPD needs

10,000 parts that CD can produce at the same variable cost per
unit but will change FPD full absorption cost. FPD will process
these parts at a cost of P10 per unit and would be sold to outside
customers at P26. FPD’s fixed costs are P30,000.

Assuming external market demand remains the same, and 10,000 units
are transferred to FPD at variable costs, CD’s gross margin would be
 a. P120,000
 b. P100,000

 Selected: c. P130,000 This answer is incorrect.

 d. P125,000
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Question 8
Goal congruence is especially relevant to all of the following except
 a. Selecting costs to be included in the performance report
 b. Setting transfer prices for an investment center
 Selected: c. Quoting prices for outside customers of an investment center This answer is
correct.
 d. Setting transfer prides for an additional profit center
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Question 9
Overland Transport co. has two divisions, Parts Division (PD) and Equipment
Division (ED). Each division manager has full responsibility on all decisions
regarding sales to internal and external customers. ED has always acquired
a certain part from PD at negotiated price of P38 per unit. Due to peso
devaluation, PD informed ED that it has increased its transfer price to P45.
The new market price is P50 per unit.

An outside supplier offered to sell ED the same part at P40 per unit and
the management of ED is considering accepting the offer. The Parts division
provided the following data:

ED’s annual parts requirements 5,000 units

PD’s variable cost per unit P 35.00
PD’s fixed cost per unit P 10.00

Parts division will have idle capacity if ED decides to buy from the
outside supplier.

What would be the advantage (disadvantage) to the company as a whole if

ED buys its parts from PD?
 Selected: a. P25,000 This answer is correct.
 b. (P25,000)
 c. P50,000
 d. (P50,000)

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Question 10
Mar Co. has two decentralized divisions, X and Y. Division X has always
purchased certain units from Division Y at P120 per unit. Because
Division Y plans to raise the price to P150 per unit, Division X desires
to purchase these units from outside suppliers at P120 per unit.
Division Y’s costs follow:
Y’s variable cost per unit P 100
Y’s annual fixed costs P 50,000
Y’s annual production for X Division 2,000 units

If Division X buys from an outside supplier, the facilities of Division Y

used to manufacture these units would remain idle.

What would be the result if Mar enforces a transfer price of P150 per
unit between Division X and Y?
 a. No effect on the company’s net income.
 b. Net advantage to the company of P240,000.
 c. Net disadvantage to the company of P200,000.
 Selected: d. Net advantage to the company of P40,000. This answer is correct.
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Question 11
This year Division A made sales to Division B at a higher transfer price that was used last year. All other things equal,
which of the following is true?
 a. B’s profit this year should be about the same last year.
 b. The company’s total profit should be about the same this year as last year.
 Selected: c. The company’s total profit should be higher this year than last year. This answer is
incorrect.
 d. A’s profit this year should be about the same last year.
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Question 12
The TP Co. has two divisions, D1 and D2. D1 produces a part that is used in the finished
product of D2. The costs of producing each part are:

Materials P 4.00
Labor 2.00
Variable overhead 2.00
Fixed costs 2.00

The part is sold in the highly competitive market for P12 each.

D2 is buying 60% of the output of D1 currently at a negotiated price of P11 each. Due
to emphasis on divisional welfare rather than company welfare, a new transfer price must
be developed. The suggestion was to add 40% to the total costs of the part when
transferring to D2. Another proposal was to use the variable costs of P8 per part in
arriving at a transfer price. D1 transferred 1,000 parts to D2.

Pertinent to data of D2 follow:

In addition to the transfer price of each part, there are additional processing and
marketing costs of P6 and P4 per unit, respectively. The selling price of the finished
product of D2 is P26.

Using the above information and suggestions, determine the gross profit per unit of
finished product for D2 based on the following transfer pricing:

a. Cost method _

b. Cost plus method _

c. Market price method _

d. Negotiated price method _

 e. Dual pricing method _

(Use only numerical value: e.g., 1, 12, 123, etc.)

The TP Co. has two divisions, D1 and D2. D1 produces a part that is used in the finished
product of D2. The costs of producing each part are:

Materials P 4.00
Labor 2.00
Variable overhead 2.00
Fixed costs 2.00

The part is sold in the highly competitive market for P12 each.

D2 is buying 60% of the output of D1 currently at a negotiated price of P11 each. Due
to emphasis on divisional welfare rather than company welfare, a new transfer price must
be developed. The suggestion was to add 40% to the total costs of the part when
transferring to D2. Another proposal was to use the variable costs of P8 per part in
arriving at a transfer price. D1 transferred 1,000 parts to D2.

Pertinent to data of D2 follow:

In addition to the transfer price of each part, there are additional processing and
marketing costs of P6 and P4 per unit, respectively. The selling price of the finished
product of D2 is P26.

Using the above information and suggestions, determine the gross profit per unit of
finished product for D2 based on the following transfer pricing:

a. Cost method 0Incorrect.

b. Cost plus method 2Correct.

c. Market price method 4Correct.

d. Negotiated price method 5Correct.

e. Dual pricing method 6Incorrect.

(Use only numerical value: e.g., 1, 12, 123, etc.)

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Question 13
An appropriate transfer price between two divisions of the Emerald
Corporation can be deterined from the following data.

Fabricating Division:
Market price of sub-assembly P 50
Variable cost of sub-assembly P 20
Excess capacity 1,000 units

Assembling Division:
Number of items needed 900 units

What is the natural bargaining range for the two divisions?

 a. Any amount less than P50
  b. Between P50 and P70
 Selected: c. Between P20 and P50 This answer is correct.
 d. P50 is the only acceptable price

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Question 14
Division A has an expected annual production of 50,000 units and fixed manufacturing costs of p300,000. The full
absorption cost per unit based on expected annual production is shown below:

Variable cost P 6.00

Fixed costs (P300,000 / 50 units) 6.00

Division A has idle capacity and Division B is considering buying 10,000 units from Division A to be processed further
and to sell at P21 per unit. Division B would incur additional processing costs and selling costs of P6 and P5 per unit,
respectively.

What would be the total contribution to profit to the company as a whole for 10,000 units transferred to Division B
and later sold to outside customers at P21 per unit?

Division A has an expected annual production of 50,000 units and fixed manufacturing costs of
p300,000. The full absorption cost per unit based on expected annual production is shown below:

Variable cost P 6.00

Fixed costs (P300,000 / 50 units) 6.00

Division A has idle capacity and Division B is considering buying 10,000 units from Division A
to be processed further and to sell at P21 per unit. Division B would incur additional processing
costs and selling costs of P6 and P5 per unit, respectively.

1. The contribution to profit per unit to Division B if the transfer price is based on full absorption cost would be
a. P4.00 b. P2.00 c.
P(2.00) d. P8.00

2. What would be the total contribution to profit to the company as a whole for 10,000 units transferred to Division B
and later sold to outside customers at P21 per unit?
a. P20,000 b. P40,000 c.
P(20,000) d. P80,000

 a. (P20,000)
 b. P80,000
 Selected: c. P40,000 This answer is correct.
 d. P20,000
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Question 15
Market-based transfer prices are best for
 Selected: a. The company when the selling division is operating at capacity. This answer is
correct.
 b. The buying division if it is operating at capacity
 c. The company when selling division is operating below capacity.
 d. The buying division
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Question 16
Which of the following items is not relevant to a decision by a divisional manager to reduce a transfer price to meet a
price offered to another division by an outside supplier?
 Selected: a. Fixed divisional overhead This answer is correct.
 b. The price offered by the outside supplier
 c. Opportunity cost
 d. Variable manufacturing costs