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MCQ- Relevant Costs/ Responsibility Accounting/Transfer Pricing MENDOZA MV

Items 1-2. The Wiley Corp. has been incurring losses by the end of the second quarter of
the current year. Management is seriously considering a temporary shutdown of activities
this coming third quarter to avoid further losses. Allocated fixed monthly operational costs
were determined to be P 60,000. Average monthly sales prior to these difficult months were
10,000 units, however for the third quarter it was projected to a very low level of only 2,500
a month.
The company’s sole product sells at P30.00, with variable costs to produce and sell
of P 18.00. If Wiley will decide to stop operations temporarily, 40% of the allocated fixed
costs will be saved, but additional shutdown costs of P 4,000 monthly will be incurred.

1. What volume of sales will give the same amount of loss as shutdown costs ?
a. 7,500 b. 15,000 c. 10,000 d. 5,000

2. How much is the advantage of the better alternative?

a. P 60,000 to continue c. P 30,000 to continue
b. P 60,000 to shutdown d. P 90,000 to continue
e. P 30,000 to shutdown

3. Dipper Company needs 20,000 of a certain part to use in its production cycle. The following
information is available:
Cost to Dipper to make the part:
Direct materials P 4
Direct labor 16
Variable overhead 18
Fixed overhead applied 10
P48
Cost to buy the part from the Orlando Co. P 36
If Dipper buys the part from Orlando instead of making it, Dipper could not use the released
facilities in another manufacturing activity. 60% of the fixed overhead applied will continue
regardless of what decision is made.
In deciding whether to make or buy the part, the total relevant costs to make the part are:
a. P560,000 b. P 640,000 c. P720,000 d. P840,000

4. Jiggler Company sells product A at a selling price of P21 per unit. Jiggler’s cost per unit
based on the full capacity of 200,000 units is as follows:
Direct materials P4
Direct labor 5
Overhead (two-thirds of which is fixed) 6
P15
A special order affecting to buy 20,000 units was received from a foreign distributor. The
only selling costs that would be incurred on this order would be P3 per unit for shipping.
Jiggler has sufficient existing capacity to manufacture the additional units. In negotiating a
price for the special order, Jiggler should consider that the minimum selling price per unit
should be
a. P14 b. P15 c. P16 d. P18

5. The Victory Co. plans to discontinue a department with a contribution to overhead of P

24,000 and allocated overhead of P 48,000, of which P 21,000 can not be eliminated. The
effect of this action to Victory’s pre tax income would be a ( an )
a. decrease of P 3,000 c. decrease of P 24,000
b. increase of P 3,000 d. increase of P 24,000

6. Andrewfield Company manufactures Part G for use in its production cycle. The costs per unit
for 10,000 unit for Part G are as follows:

Direct materials P3
Direct labor 15
Variable overhead 6
Fixed overhead 8
P32
Geron Company has offered to sell Andrewfield 10,000 units of Part G for P30 per unit. If
Andrewfield accepts Geron’s offer, the released facilities could be used to save P45,000 in
relevant costs in the manufacture of Part H. In addition P5 per unit of the fixed overhead
applied to Part G would be totally eliminated. What alternative is more desirable and by what
amount is it more desirable?
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Alternative Amount
a. Manufacture P10,000
b. Manufacture 15,000
c. Buy 35,000
d. Buy 65,000

7. Relical Corporation manufactures batons. Relical can manufacture 300,000 batons a year at a
variable cost of P750,000 and a fixed cost of P450,000. Based on Relical’s predictions, 240,000
batons will be sold at the regular price of P5.00 each. In addition, a special order was placed for
60,000 batons to be sold at a 40% discount off the regular price. By what amount would income
before taxes be increased or decreased as a result of the special order?
a. P60,000 decrease c. P 36,000 increase
b. P30,000 increase d. P 180,000 increase

8. The Glade Division of Dona Company produces hardened steel blades. One third of the Glade
Division’s output is sold to the Lawn Products Division of Dona; the remainder is sold to outside
customers. The Glade Division’s estimated sales and standard cost data for the fiscal year ending
June 30, 20-1, are as follows:
Lawn Products Outsider
Sales P 15,000 P40,000
Variable costs ( 10,000) ( 20,000)
Fixed costs ( 3,000) ( 6,000)
Gross margin P 2,000 P14,000
Unit sales 10,000 20,000
The Lawn Products Division has an opportunity to purchase 10,000 identical quality from an
outside supplier at a cost of P1.25 per unit on a continuing basis. Assume that the Glade Division
cannot sell any additional products to outside customers. Should Dona allow its Lawn Products
Division to purchase the blades from the outside supplier, and why?
a. Yes, because buying the blades would save Dona Company P500
b. No, because making the blades would save Dona Company P1,500
c. Yes, because buying the blades would save Dona Company P2,500
d. No, because making the blades would save Dona Company P 2,500

9. Peter Company is considering a proposal to replace existing machine used for the
manufacture of product A. The new machine are expected to cause increased annual
fixed costs of P120,000; however, variable cost should decrease by 20% due to a
reduction in direct labor hours and more efficient usage of direct materials. Before this
change was under consideration, Peter has budgeted product A sales and costs for 20-
1 as follows:
Sales P 2,000,000
Variable costs 70% of sales
Fixed costs P 400,000
Assuming that Peter implemented the above proposal by January 1, 20-1. What would be the
increase in budgeted operating profit for Product A for 20-1?
a. P160,000 b. P280,000 c. P360,000 d. P480,000

Items 10 and 11 Paula Co. sells two products with the following characteristics:
Product Alma Product Belda
Quantity sold 100,000 units 50,000 units
Standard cost per unit
Fixed P 10 P 20
Variable 10 40
Total P 20 P 60
Sales price P 30 P 54
10. Which product (s) should the firm continue selling assuming fixed costs will remain the same?
a. Product Alma only c. Both Products
b. Product Belda only d. None of these
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11. If Paula Co. has an opportunity of replacing Product Belda with Product

Charlotte ( the two products are mutually exclusive ) with these characteristics:

Quantity sold 25,000 u

Standard unit costs
Fixed P 40
Variable 20
Sales price P 50
The Paula Co. should
a. Produce product Charlotte only
b. Produce Products Alma and Belda
c. Produce Product Alma only
d. Produce Products Alma and Charlotte

12. Zany Company produces and sells 8,000 units of Product X each year. Each unit of Product X
sells for P10 and has a contribution margin of P6. It is estimated that if Product X is discontinued,
P50,000 of the P60,000 in fixed costs charged to Product X could be eliminated. These data
indicate that if Product X is discontinued, overall company operating income should:
a. increase by P2,000 per year.
b. decrease by P2,000 per year.
c. increase by P38,000 per year.
d. decrease by P38, 000 per year.

13. ODD Realty managers five apartment complexes in its region. Shown on the next page are
summary income statement for each apartment complex:
Apartment complexes
U V W X Y
Rental income P1,000 P1,210 P2,347 P1,878 P1,065
Expenses 800 1,300 2,600 2,400 1,300
Operating P 200 P( 90) P( 253) P (522) P( 235)
income
Included in the expenses is P1,200 of common corporate expenses that have been allocated to
the apartment complexes based on rental income. These common corporate expenses would
have to be incurred regardless of how many apartment complexes ODD Realty managers. The
apartment complex(s) that ODD Realty should consider dropping is (are):
a. V, W, X, Y b. W, X,Y c. X,Y d. X

14. From a particular joint process, Ycarrus Company produces three products, X, Y and Z. Each
product may be sold at the point of split or processed further. Additional processing requires no
special facilities, and production costs of further processing are entirely variable and traceable to
the products involved. 1n 20-2, all three products were processed beyond split-off. Joint
production costs for the year were P60,000. Sales values and costs needed to evaluate Ycarrus’s
20-2 production policy follow.
Additional Costs and Sales
Units Sales Values Value if Processed Further
Product Produced At Split-Off Sales Values Added Costs
X 6,000 P25,000 P42,000 P 9,000
Y 4,000 41,000 45,000 7,000
Z 2,000 24,000 32,000 8,000
Joint costs are allocated to the products in proportion to the relative physical volume of outputTo
Maximize profit, Ycarrus should subject the following product(s) to additional processing
a. X only b. X,Y and Z c. Y and Z only d. Z only

15. The West division sells goods internally to the South division of the NorthEast company.
The quoted external price of the product being transferred internally is P 200 per ton plus
transportation. It costs P 20 per ton to transport the product to South division. West’s actual
unit cost of the product are as follows:
Direct materials P 100
Direct labor 50
Costs of handling/storage 40
The Company president selects a P 220 transfer price. This an example of
a. Market based transfer price c. Negotiated transfer price
b. Cost based transfer price d. cost plus 20% transfer price
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16. Honest Service Co. is a computer service center. For the month of May, Honest had
the following operating data:
Sales P 450,000 Operating income P 25,000
Net income 8,000 Total Average Operating Assets 500,000
Shareholders’ equity 200,000 Cost of capital 6%
Which of the following is TRUE?
a. ROI is 4% c. ROI is 1.6%
b. Residual income is (P 5,000) d. Residual income is ( P 22,000)

17. An internal transfer between divisions is in the best economic interest of a company if
a. the variable production costs plus the opportunity cost for the selling division is greater than
the external price for the buying division.
b. there is idle capacity in the buying division
c. there is no opportunity cost for the division
d. the variable production costs plus the opportunity cost for the selling division is less than the
external price for the buying division

18. Joey Corporation has two producing centers, A and B. Department A has a variable cost
of P12 per unit for its products, and a total fixed cost of P20,000. Department A also has idle
capacity for up to 50,000 units per month. Department B would like to purchase 20,000 units
of Department A’s products per month, but is unable to convince Department A to transfer
units to B at P16. Department A has consistently argued that the market price of P20 is
nonnegotiable. What is A’s opportunity cost of transferring to B as opposed to selling to
outsiders?
a. P0 b. P12 c. P18 d. P20

Questions 19 to 20 Candace, Inc. operates two divisions: a management division that owns
and manages cruise ships in the Flores Keys; and a repair division that operates a dry dock in
Marbelle Sand. The repair division works on company ships, as well as other large-hull boats.
The repair division has an estimated variable cost of P28.5 per labor-hour. The repair
division has a two year backlog of work for outside owner ships. They charge P48 per hour for
labor, which is standard for this type of work. The management division complained that it could
hire its own repair workers for P30 per hour (including leasing work area).

19. What is the minimum transfer price that the repair division should obtain for its
services, assuming it is operating at capacity?
a. P28.50 per hour b. P30.00 per hour c. P48.00 per hour d. none of these

20. What is the maximum price the management division should pay?
a. P28.50 b. P30.00 c. P48.00 d. none of these

21. Assume for this question only, if the Repair division has sufficient capacity for the
need of the Management Division, what is the minimum transfer price that the repair division
should obtain?
a. P28.50 b. P30.00 c. P48.00 d. none of these

22. You have been provided with the following information for Division X of a decentralized
company:
Selling Price P 45
Variable Cost per unit 33
Fixed cost per unit 12
Sales (units) 22,500
Capacity (units) 25,000

Division W would like to purchase all of its units internally. Division W needs 6,000 units each
period and currently pays P42 per unit to an outside firm. What is the lowest price that Division
X could accept from Division W?
a. P45. b. P42 c. P40. d. P38.

Items 23-24. Phoebe Inc., has two divisions. Division A has an average investment base of
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P750,000 and produces (and sells) 100,000 units of Nemo at a market price of P10.00 per unit.
Variable costs total P3.50 per unit, and fixed charges are P4.00 per unit (based on a capacity of
120,000 units). Division B wants to purchase 25,000 units of Nemo from Division A. However,
Division B is only willing to pay P6.75 per unit.

23. What is the return on investment (ROI) for Division A if it transfers 25,000 units to
Division B at P 6.75 per unit?
a. 22.7% b. 29.2% c. 32.8% d. 50.0%
24. What is the minimum transfer price for the 25,000 unit order that Division A would
accept?
a. P3.50 b. P4.00 c. P4.80 d. P6.00

25. Return on investment (ROI) is a very popular measure employed to evaluate the
performance of corporate segments because it incorporates all of the major ingredients of
profitability (revenue, cost, investment) into a single measure. Under which one of the following
combinations of actions regarding a segment's revenues, costs, and investment would a
segment's ROI always increase?

a. Increase Decrease Increase

b. Decrease Decrease Decrease
c. Increase Increase Increase
d. Increase Decrease Decrease

26. A large manufacturing company has several autonomous divisions that sell their products in
perfectly competitive external markets as well as internally to the other divisions of the
company. Top management expects each of its divisional managers to take actions that will
maximize the organization's goal as well as their own goals. Top management also promotes a
sustained level of management effort of all of its divisional managers. Under these
circumstances, the transfer price that will generally lead to optimal decisions for the
manufacturing company would be a transfer price equal to the
a. full cost of the product. c. variable cost of the product plus a markup.
b. full cost of the product plus a markup. d. market price of the product.

27. Which of the following statement(s) is/are true?

(A) If a division's return on investment (ROI) exceeds its cost of capital, then its residual income
is positive.
(B) If a division's cost of capital equals its return on investment (ROI), then its residual income
is zero.
a. only (A) is true c. both (A) and (B) are true
b. only (B) is true d. neither (A) and (B) is true

Items 28-29. The Motor Division of Dynamic Engine Corporation uses 5,000 carburetors per
month in its production of automotive engines. It presently buys all of the carburetors it needs
from two outside suppliers at an average cost of P100. The Carburetor Division of Dynamic
Engine Corporation manufactures the exact type of carburetor that the Motor Division requires.
The Carburetor Division is presently operating at its capacity of 15,000 units per month and sells
all of its output to a foreign car manufacturer at P106 per unit. Its cost structure (on 15,000
units) is:

Variable production costs P70

Variable selling costs 10
All fixed costs 10
Assume that the Carburetor Division would not incur any variable selling costs on units that are
transferred internally.
28. Refer to Dynamic Engine Corporation. What is the maximum of the transfer price
range for a transfer between the two divisions?
a. P 106 c. P 90
b. P 100 d. P 70
29. Refer to Dynamic Engine Corporation. What is the minimum of the transfer price
range for a transfer between the two divisions?
a. P 96 c. P 70
b. P 90 d. P 106

30. The Val Division of Industrial Company produces a small valve that is used by various
companies as a component part in their products. Industrial Company operates its divisions as
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autonomous units, giving its divisional manager great discretion in pricing and other decisions.
Each division is expected to generate a rate of return of at least 14 percent on its operating
assets. The Val Division has average operating assets of P700,000. The valves are sold for
P5 each. Variable costs are P3 per valve, and fixed costs total P462,000 per year. The Division
has a capacity of 300,000 units.
How many valves must the Val Division sell each year to generate the desired rate of return on
its assets?
A. 280,000 C. 355,385
B. 350,000 D. 265,000

Items 31 to 35. The following information was taken from the segmented income statement of
Restin, Inc., and the company's three divisions:
Los Bay Central
Restin, Angeles Area Valley
Inc. Division Division Division
Revenues P750,000 P200,000 P235,000 P325,000
Variable operating expenses 410,000 110,000 120,000 180,000
Controllable fixed expenses 210,000 65,000 75,000 70,000
Noncontrollable fixed expenses 60,000 15,000 20,000 25,000

In addition, the company incurred common fixed costs of P18,000.

31. Bay Area's segment profit margin is:
A. P14,000.
B. P18,000.
C. P20,000.
D. P40,000.
32. The profit margin controllable by the Central Valley segment manager is:
A. P32,000. C. P50,000.
B. P44,000. D. P75,000.

33. Assuming use of a responsibility accounting system, which of the following amounts
should be used to evaluate the performance of the Los Angeles division manager?
A. P4,000. C. P10,000.
B. P8,000. D. P25,000.

34.Which of the following amounts should be used to evaluate whether Restin, Inc., should
continue to invest company resources in the Los Angeles division?
A. P4,000. C. P10,000.
B. P8,000. D. P25,000.

35. Assume that the Los Angeles division increases its promotion expense, a controllable
fixed cost, by P10,000. As a result, revenues increase by P50,000. If variable expenses
are tied directly to revenues, the new Los Angeles segment profit margin is:
A. P12,500.
B. P22,500.
C. P32,500.
D. P50,000.

36. For the period just ended, United Corporation's Delta Division reported profit of P31.9 million
and invested capital of P220 million. Assuming an imputed interest rate of 12%, which of the
following choices correctly denotes Delta's return on investment (ROI) and residual income?
Return on Residual
Investment Income
A. 12.0% P(5.5) million
B. 12.0% P5.5 million
C. 14.5% P(5.5) million
D. 14.5% P5.5 million

End