1. Under which of the following circumstances could allocations (including trans
ID: 2566351 • Letter: 1
Question
1. Under which of the following circumstances could allocations (including transfer prices) affect the firm's income?
a. Regulatory agencies use reports on the affected segments
b. The allocations prompt managers to alter their decisions
c. The firm operates in more than one state/country
d. All of the above
2. Using a transfer price equal to the market price of outside providers of a service is
a. Likely to encourage use of the service of the internal provider
b. A good policy unless segments are free to acquire the service from an outside provider
c. Particularly appropriate if the service departement is operating at or near capacity
d. Better than using no transfer price
Explanation / Answer
1.
a.Regulatory agencies like income tax departments may question the transfer price and may consider the different price for tax calculation purpose
b.If the transfer is better than outside price then the manager would take a decision to procure it from internally rather than market
c.If the firm operates in more than one country/state, transfer price may attract transaction taxes like sales tax and income tax based on the value decided by income tax department ----which ultimately affects firm's income
d.Accordingly all of the above is correct answer
2.
a.
b. If the segments are not allowed procure from outsiders and market price= transfer price then it is good policy as it reflects true cost of services---correct
.
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