A division of a company transfers all its output to other divisions in the same company. For this division, which of the following measures is NOT…

The transfer price is the internal value assigned to a product or service when it is transferred from one division to another within the same company. For the selling division, this transfer price becomes its sales revenue. This revenue figure is a critical component in calculating the division's operating profit (Revenue - Costs). Consequently, any performance measure derived from profit, such as Return on Investment (ROI), will also be directly affected by the transfer price. However, the 'cost of components purchased' by the selling division is an external cost determined by its suppliers. This cost is incurred to produce the output and is independent of the internal price at which that output is later transferred to another division.

A. Operating profit is directly affected because the transfer price determines the selling division's revenue, a key component of the profit calculation.

B. Return on investment is calculated using operating profit (e.g., Profit / Capital Employed), so it is inherently affected by the transfer price.

D. Sales revenue for the selling division is calculated as the quantity of units transferred multiplied by the transfer price, making it entirely dependent on it.

1. Drury

C. (2018). Management and Cost Accounting. 10th ed. Cengage Learning EMEA. Chapter 21

"Divisional financial performance measures

" clarifies that a transfer price constitutes revenue for the selling division and a cost for the buying division. This directly impacts the reported profits of both divisions

which are used for performance evaluation. The selling division's own input costs are treated as separate

external expenditures.

2. Horngren

C. T.

Datar

S. M.

& Rajan

M. V. (2017). Cost Accounting: A Managerial Emphasis. 16th ed. Pearson. Chapter 23

"Pricing Decisions and Cost Management

" explains that transfer prices create revenues for the selling subunit and costs for the buying subunit. This directly affects the operating income of each subunit

and thus performance measures like ROI. The chapter implicitly distinguishes these internal prices from the external costs a division incurs for its own raw materials and components.

3. Zimmerman

J. L.

& Yahya-Zadeh

M. (2011). Accounting for Decision Making and Control. 7th ed. McGraw-Hill/Irwin. Chapter 6

"Responsibility Centers and Transfer Pricing

" describes how the choice of transfer price reallocates total company profits between divisions. It explicitly states that the transfer price becomes the selling division's revenue and the buying division's cost

thereby affecting all profit-based metrics for those divisions. The costs incurred by the selling division to acquire its own inputs are determined by external markets

not the internal transfer price.