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Supplementary objective test questions

CHAPTER 9 – TRANSFER PRICING

9.1 The IP Group has two divisions: H and J. Division H manufactures only one
type of product, the widget, which it sells to external customers and to division
J. The Group's policy is that divisions have total freedom to choose their
suppliers.

Maximum capacity 250,000 widgets

External sales 250,000 widgets

External selling price $78 per widget
Variable cost $62 per widget

Fixed costs $2,200,000

Division J

Budgeted requirement for widgets in the coming year is 125,000 widgets. These
will be converted into the 'W plus' product at a cost of $18 per item, and sold to
customers at a price of $99.

Division J has found another company willing to supply widgets at a price of
$85 per widget.

What is the optimal transfer price for the widgets that division H should
quote division J that will achieve goal congruence for IP Group?

A $78 per widget

B Between $78 and $85 per widget

C Between $78 and $81 per widget

D $85 per widget

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