Multiple choice question
1. Which of the following would be an acceptable transfer price under the resale price method?
a. $700
b. $750
c. $795
d. $825
Babcock Company manufactures fast-baking ovens in the United States at a produc¬tion cost of $500 per unit and sells them to uncontrolled distributors in the United States and a wholly owned sales subsidiary in Canada. Babcock's U.S. distributors sell the ovens to restaurants at a price of $1,000, and its Canadian subsidiary sells the ovens at a price of $1,100. Other distributors of ovens to restaurants in Canada normally earn a gross profit equal to 25 percent of selling price. Babcock's main competitor in the United States sells fast-baking ovens at an average 50 percent markup on cost. Babcock's Canadian sales subsidiary incurs operating costs, other than cost of goods sold, that average $250 per oven sold. The average operating profit margin earned by Canadian distributors of fast-baking ovens is 5 percent.
2. Which of the following would be an acceptable transfer price under the cost-plus method?
a. $700
b. $750
c. $795
d. $825