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Question(s) / Instruction(s):

61.     A major reason for transfer pricing is to communicate data that will lead to goal-congruent decisions.

62.     Transfer prices are the amounts charged by one segment of an organization for a product or service that it supplies to an outside firm.

63.     The transfer price is revenue to the acquiring segment, and it is a cost to the segment producing the product or service.
64.     Multinational companies use transfer pricing to minimize their worldwide taxes, duties, and tariffs.
65.     There is no perfect transfer pricing system.

66.     If there is a competitive market for the product or service being transferred internally, using the cost-based price as a transfer price will generally lead to the desired goal congruence and managerial effort.

67.     When a division has idle production capacity, variable cost is the transfer price that leads to optimal decision making.

68.      Dysfunctional behavior is action taken in conflict with organizational goals.

69.     Generally, the transfer price = outlay cost + opportunity cost.
70.     Outlay cost is often the variable cost for producing the item transferred.
71.     Opportunity cost is the minimum contribution to profit that the selling segment forgoes by transferring the item internally.
72.     In cases of constrained capacity, the opportunity cost is zero.

73.     It is recommended that budgeted or standard costs be used instead of actual costs for cost-based transfer prices.
74.     If using actual costs for cost-based transfer pricing, the supplying division lacks incentive to control its costs.
75.     A drawback to market-based prices is that in an imperfectly competitive market, the price of one division has to pay to buy an item may be less than the amount another division gets for selling the same item.
76.     A full-cost or full-cost plus profit transfer price would potentially create dysfunctional behavior.
77.     With no opportunity cost, using the market price as a transfer price will not create dysfunctional decisions.
78.     When the selling division cannot sell an item on the external market, using either a market-based or cost-based transfer for the item can lead to dysfunctional decisions.
79.     The time and effort spent negotiating a transfer price between a company’s divisions add nothing directly to the profits of the company.
80.     Top managers who wish to encourage decentralization will often make sure that both production and purchasing division managers understand all the facts and then allow the managers to negotiate a transfer price.


81.     Income taxes rarely influence the setting of transfer prices.

82.     Low transfer prices generally lead to low import duties.
83.     United States multinational companies must use a transfer price that one division would pay another if they were independent companies.

84.     A management by objectives approach stresses budgeted results.
85.     Companies will not be harmed if they overemphasize meeting a budget when evaluating managers.

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