Transfer Pricing Paper 1

1

Cuff Caterers quotes a price of $60 per person for a dinner party. This price includes the 6% sales tax and the 15% service charge. Sales tax is computed on the food plus the service charge. The service charge is computed on the food only. At what amount does Cuff price the food?






2

Based on potential sales of 500 units per year, a new product has estimated traceable costs of $990,000. What is the target price to obtain a 15% profit margin on sales?






3

Briar Co. signed a government construction contract providing for a formula price of actual cost plus 10%. In addition, Briar was to receive one-half of any savings resulting from the formula price being less than the target price of $2,200,000. Briar’s actual costs incurred were $1,920,000. How much should Briar receive from the contract?






4

Vince, Inc. has developed and patented a new laser disc reading device that will be marketed internationally. Which of the following factors should Vince consider in pricing the device? I. Quality of the new device. II. Life of the new device. III. Customers’ relative preference for quality compared to price.






5

Ajax Division of Carlyle Corporation produces electric motors, 20% of which are sold to Bradley Division of Carlyle and the remainder to outside customers. Carlyle treats its divisions as profit centers and allows division managers to choose their sources of sale and supply. Corporate policy requires that all interdivisional sales and purchases be recorded at variable cost as a transfer price. Ajax Division’s estimated sales and standard cost data for the year ending December 31, 2012, based on the full capacity of 100,000 units, are as follows:
. . . . . . . Bradley . . .Outsiders
Sales . . . $ 900,000 $ 8,000,000
Variable costs (900,000) (3,600,000)
Fixed costs . . (300,000) (1,200,000)
Gross margin . . $(300,000) $ 3,200,000
Unit sales . . .20,000 80,000
Ajax has an opportunity to sell the above 20,000 units to an outside customer at a price of $75 per unit during 2011 on a continuing basis. Bradley can purchase its requirements from an outside supplier at a price of $85 per unit. Assuming that Ajax Division desires to maximize its gross margin, should Ajax take on the new customer and drop its sales to Bradley for 2012, and why?






6

The management of James Corporation has decided to implement a transfer pricing system. James’ MIS department is currently negotiating a transfer price for its services with the four producing divisions of the company as well as the marketing department. Charges will be assessed based on number of reports (assume that all reports require the same amount of time and resources to produce). The cost to operate the MIS department at its full capacity of 1,000 reports per year is budgeted at $45,000. The user subunits expect to request 250 reports each this year. The cost of temporary labor and additional facilities used to produce reports beyond capacity is budgeted at $48.00 per report. James could purchase the same services from an external Information Services firm for $70,000. What amounts should be used as the ceiling and the floor in determining the negotiated transfer price?






7

Systematic evaluation of the trade-offs between product functionality and product cost while still satisfying customer needs is the definition of






8

Which of the following statements regarding transfer pricing is false?






9

A newly developed product by Medina Co. is expected to sell 5,000 units per year and the costs of producing this product are expected to be, in total, $450,000 per year. Medina would like to have a gross profit of 30% of the sales price. In order to achieve this, what price (rounded to the nearest dollar) does Medina need to set for this product?






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