For the following questions (8-10) about transfer pricing, assume the organization is X Co. Division S produces a component that can be sold to outside customers at a fair market price or to Division B at a transfer price. Division B uses the component to produce a finished product it sells to outside customers. Division B can also purchase the component from an outside supplier, Co. O at a fair market price.

8. Division S produces a component that is used by Division B. Division Ss costs of manufacturing the component is: Direct materials $30; Direct labor $8; Variable overhead $10; Fixed overhead $12 (based on a practical volume of 250,000 components).

Division S also incurs these costs: fixed selling & administrative $1,200,000, and variable selling $4/unit.

Division S expects to sell only 200,000 components next year. The variable selling expenses are avoidable if the component is sold internally.

Division B has been buying the same component from an external supplier for $80 each. It expects to use 40,000 units of the component next year. The manager of Division B has offered to buy 40,000 units from Division S for $56 each.

The maximum/minimum transfer price should be respectively:

a.	$80/48	c.	$48/48
b.	$60/50	d.	$38/30

9. Refer to question 8. Suppose Divisions S and B agree on a transfer price of $56. What is the benefit to each division respectively?

a.	$320,000/$960,000	c.	$960,000/$320,000
b.	$1,280,000/$0	d.	$0/$1,280,000

10. Refer to question 8. If S is at full capacity, the transfer price should be:

a.

Between $30 and $80

c.

$30

b.

$80

d.

$60

16. Time-s

For the following questions (8-10) about transfer pricing, assume the organization is X Co. Division S produces a component that can be sold to outside customers at a fair market price or to Division B at a transfer price. Division B uses the component to produce a finished product it sells to outside customers. Division B can also purchase the component from an outside supplier, Co. O at a fair market price.

8. Division S produces a component that is used by Division B. Division Ss costs of manufacturing the component is: Direct materials $30; Direct labor $8; Variable overhead $10; Fixed overhead $12 (based on a practical volume of 250,000 components).

Division S also incurs these costs: fixed selling & administrative $1,200,000, and variable selling $4/unit.

Division S expects to sell only 200,000 components next year. The variable selling expenses are avoidable if the component is sold internally.

Division B has been buying the same component from an external supplier for $80 each. It expects to use 40,000 units of the component next year. The manager of Division B has offered to buy 40,000 units from Division S for $56 each.

The maximum/minimum transfer price should be respectively:

a.	$80/48	c.	$48/48
b.	$60/50	d.	$38/30

9. Refer to question 8. Suppose Divisions S and B agree on a transfer price of $56. What is the benefit to each division respectively?

a.	$320,000/$960,000	c.	$960,000/$320,000
b.	$1,280,000/$0	d.	$0/$1,280,000

10. Refer to question 8. If S is at full capacity, the transfer price should be:

a.

Between $30 and $80

c.

$30

b.

$80

d.

$60

16. Time-s

For the following questions (8-10) about transfer pricing, assume the organization is X Co. Division S produces a component that can be sold to outside customers at a fair market price or to Division B at a transfer price. Division B uses the component to produce a finished product it sells to outside customers. Division B can also purchase the component from an outside supplier, Co. O at a fair market price.

8. Division S produces a component that is used by Division B. Division Ss costs of manufacturing the component is: Direct materials $30; Direct labor $8; Variable overhead $10; Fixed overhead $12 (based on a practical volume of 250,000 components).

Division S also incurs these costs: fixed selling & administrative $1,200,000, and variable selling $4/unit.

Division S expects to sell only 200,000 components next year. The variable selling expenses are avoidable if the component is sold internally.

Division B has been buying the same component from an external supplier for $80 each. It expects to use 40,000 units of the component next year. The manager of Division B has offered to buy 40,000 units from Division S for $56 each.

The maximum/minimum transfer price should be respectively:

a.	$80/48	c.	$48/48
b.	$60/50	d.	$38/30

9. Refer to question 8. Suppose Divisions S and B agree on a transfer price of $56. What is the benefit to each division respectively?

a.	$320,000/$960,000	c.	$960,000/$320,000
b.	$1,280,000/$0	d.	$0/$1,280,000

10. Refer to question 8. If S is at full capacity, the transfer price should be:

a.	Between $30 and $80	c.	$30
b.	$80	d.	$60 16. Time-s