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ACCT3203 Contemporary Management Accounting
Tutorial Questions with Suggested Answers
Management Control Systems and Transfer Pricing
PART (A): Multiple Choice
: Select the
answer for the following questions.
Which of the following is a cost associated with decentralization?
Not enough time spent in gathering information about different subunits of the
Decreased loyalty toward the organization as a whole
Focus manager’s attention on the subunit rather than the company as a
whole (pp.866 – cost of decentralization (2) unhealthy competition
Lack of day-to-day involvement by top management in operating decisions
A transfer-pricing method leads to goal congruence when managers:
always act in their own best interest
act in their own best interest and the decision is in the long-term best interest of
the manager's subunit
act in their own best interest and the decision is in the long-term best interest
of the company
(pp. 869 – align with the objectives of top management)
act in their own best interest and the decision is in the short-term best interest of
In analyzing transfer prices, the:
buyer will not willingly purchase a product for less than the incremental costs
incurred to manufacture the product internally
seller will not willingly sell a product for less than the incremental costs
incurred to make the product
buyer will willingly pay more than the ceiling transfer price
buyer will not pay less than the ceiling transfer price
THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 4 THROUGH 7:
Calculate the Division operating income for the BetaShoe Company which manufactures only
one type of shoe and has two divisions, the Sole Division, and the Assembly Division. The Sole
Division manufactures soles for the Assembly Division, which completes the shoe and sells it to
retailers. The Sole Division "sells" soles to the Assembly Division. The market price for the
Assembly Division to purchase a pair of soles is $20. (Ignore changes in inventory.) The fixed
costs for the Sole Division are assumed to be the same over the range of 40,000-100,000 units.
The fixed costs for the Assembly Division are assumed to be $7 per pair at 100,000 units.
Sole's costs per pair of soles are
Division fixed costs
Assembly's costs per completed pair of shoes are
Division fixed costs
What is the market-based transfer price per pair of soles from the Sole Division to the
$20 as given in the problem.
What is the transfer price per pair of shoes from the Sole Division to the Assembly
Division per pair of soles if the transfer price per pair of soles is 125% of full costs?
$10 x 1.25 = $12.50
Assume the transfer price for a pair of soles is 180% of total costs of the Sole Division and
40,000 of soles are produced and transferred to the Assembly Division. The Sole Division's
operating income is:
Revenue (1.8 x $10) x 40,000)) =
Costs ($10 x 40,000) =
If the Assembly Division sells 100,000 pairs of shoes at a price of $60 a pair to customers,
what is the operating income of both divisions together?
Revenues = ($60 x 100,000) =
Cost = ($26 x 100,000) =
Operating income =
Additional Discussion Questions for Beta Shoes:
Calculate and compare the difference in overall corporate net income between Scenario A and
Scenario B if the Assembly Division sells 100,000 pairs of shoes for $60 per pair to
Scenario A: Negotiated transfer price of $15 per pair of soles
Scenario B: Market-based transfer price
$500,000 more net income under Scenario A
$500,000 of net income using Scenario B
$100,000 of net income using Scenario A.
None of these answers is correct.
The net income would be the same under both scenarios.