ECONOMICS

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COST ACCOUNTING

RESPONSIBILITY ACCOUNTING

Question [CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
ABC’s Division X, a profit center, sells its products to external customers as well as to other internal profit centers. Which one of the following circumstances would justify the Division X selling a product internally to other profit center at a price that is below the market-based transfer price?
A
The buying unit has excess capacity
B
The selling unit is operating at full capacity
C
Routine sales commissions and collection costs would be avoided
D
The profit centers’ managers are evaluated on the basis of unit operating income
Explanation: 

Detailed explanation-1: -A center that incurs costs and expenses, generates revenues but does not have control over idle funds used for investment purposes is called a profit center.

Detailed explanation-2: -Usually, this rule is restated to say that the transfer price should be no greater than the net marginal revenue of the receiving division, where the net marginal revenue is marginal revenue less own marginal costs.

Detailed explanation-3: -A Profit Centre is a division of an organization responsible for its profits and losses. It can be a business unit, geographical area, or product line.

Detailed explanation-4: -A profit centre manager has control over both cost and revenue but not capital investment decisions. As profit centres include both revenues and costs, performance reports typically focus on income (revenue – costs) measures, such as segment margins.

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