Transfer prices: (Check all that apply.)
A are transfers within the same company.
B have a direct impact on the company’s overall pr are not used in investment centers.
C have a direct impact on division income.
D are prices charged to outside customers.
The correct answer and explanation is :
The correct answers are:
A) are transfers within the same company.
C) have a direct impact on division income.
Explanation:
Transfer prices are the prices charged for goods or services sold between divisions or departments within the same company. These prices are not applicable to transactions with external customers, as those are handled through regular pricing mechanisms for sales to outside entities. Here’s a breakdown of the options:
- A) are transfers within the same company – This statement is correct because transfer prices refer specifically to the pricing mechanism used when one division or department within a company sells goods or services to another division or department. These internal transactions do not involve outside customers but instead reflect intra-company transfers.
- B) have a direct impact on the company’s overall profit but are not used in investment centers – This statement is incorrect for a couple of reasons. While transfer prices do indeed affect a company’s overall profit (through internal transactions that might impact the company’s revenue or cost structures), transfer prices are often used in investment centers. Investment centers are segments within a company that are responsible not only for generating revenue but also for controlling costs and capital investments. The transfer prices are crucial in such centers for accurately measuring divisional performance.
- C) have a direct impact on division income – This statement is correct because transfer prices affect the income of the divisions involved in the transaction. If one division sells goods or services to another, the price set for the transfer will affect the selling division’s revenue and the purchasing division’s cost, thus directly impacting their respective income statements.
- D) are prices charged to outside customers – This statement is incorrect because transfer prices are exclusively for internal transactions within the company. Prices charged to outside customers are generally known as external sales prices, which are different from internal transfer prices.
In conclusion, transfer prices are key tools for managing intra-company transactions, impacting the financial outcomes and performance measurements of various divisions. They are designed to allocate costs, set performance targets, and provide accurate division income reporting.