Question 1

A cost center can be asked to achieve one of two typical objectives. A cost center can either minimize costs for a given output or it can:
A) maximize costs at a variable output.
B) maximize output for a given budget.
C) minimize costs for a variable output.
D) minimize output for a given budget.

Accepted Answer

The second objective for a cost center is to maximize output for a given budget. This means that the cost center is expected to produce the maximum possible output for the resources allocated to it, without exceeding the budget. This objective is suitable for a cost center that operates in a competitive environment, where higher output can lead to increased revenue or market share. Minimizing costs for a given output is a common objective for cost centers that produce a fixed quantity of output, such as a utility company that must supply a certain amount of electricity or water to customers.

Question 2

One of the problems of transfer prices comes from the successive impact of the prices as the product moves downstream toward the consumer. At each step the transfer price becomes the ____________ for the next part of the company.
A) market price
B) total cost
C) marginal cost
D) negotiated price

Accepted Answer

C

Question 3

The CEO of Always Round Tire has decided to open a battery division. He thinks that batteries would sell well with tires at their outlets AND that Always Round's quality reputation will be transferred to the batteries. Should he set up the new division as a Revenue Center, as a Profit Center, or as an Investment Center? Why?

Accepted Answer

The new division should be set up as a profit center. Batteries are a separate product from tires and therefore the division's profitability can be easily measured and rewarded. A revenue center with pricing authority would set price lower than the profit-maximizing price which would reduce the value of the firm. The CEO should be aware that incentives at the retail level will need to support both tire sales and battery sales. In addition, he should take steps to guard against double markups in transfer pricing from the battery division to the retail outlets.

Question 4

If there exists an external market for an intermediate good produced by a company, then an easy way to set the set a transfer price would be to use:
A) market-based transfer prices.
B) marginal cost transfer prices.
C) full-cost transfer prices.
D) success monopoly transfer prices.

Accepted Answer

Market-based transfer prices would be the best choice in this scenario because there already exists an external market for the intermediate good, meaning that an established price exists that can be used as a benchmark for the transfer price. Using a market-based transfer price would ensure that both the selling division and the buying division are acting in their own best interests, and that the transfer price is fair and based on the prevailing market conditions.

Question 5

A manager in an Investment Center is offered a potential investment that would have an ROA of 15 percent. After the investment, it would make up 20 percent of his total portfolio. Currently, he makes 20 percent on his portfolio, though the company requires only 12 percent. Which of the following is true?
A) He will make the investment since it is 3 percent greater than the company's required return.
B) He will make the investment because a larger portfolio is always better than a smaller portfolio.
C) He will not make the investment because it the company prefers 12 percent
D) He will not make the investment because it lowers his over all return to 19 percent.

Accepted Answer

The manager will not make the investment because it would lower his overall return from 20 percent to 19 percent, which is less than his current portfolio return.

Question 6

What are the measures of performance for investment centers? How do they work?

Accepted Answer

The answer of What are the measures of performance for...

Question 7

If each division of a company with a monopoly niche is allowed to set its transfer price at the profit-maximizing level for the next division as the product flows toward the consumer (assuming no external market for the product), then prices will:
A) be higher and profits lower than with non-divisional organization.
B) be lower and profits higher than with a non-divisional organization.
C) be the same and profits will be the same as with a non-divisional organization.
D) match the competitive benchmark and profits will be zero.

Accepted Answer

Divisions in a company with a monopoly niche are likely to set transfer prices at a higher level to maximize profits for each subsequent division. This can result in higher overall prices for the consumer and lower profits for the company compared to a non-divisional organization where transfer prices are not optimized for profit maximization. Therefore, option A is the correct answer.

Question 8

Transfer prices or charge-back prices are ________ of most businesses.
A) required by federal law
B) typical
C) unusual
D) only part of the international component

Accepted Answer

Transfer prices or charge-back prices are typical of most businesses as they are used for internal management purposes, such as evaluating the performance of different divisions or subsidiaries within the company. However, they are not legally required and may not be part of the international component for every company.

Question 9

Many firms have to transfer partially-produced products among its divisions, often across national borders. One the key issues in establishing a reliable performance system for each subunit or division is the:
A) degree held by the manager of the division.
B) transfer prices used for intra-company product movement.
C) choice of low cost / high volume strategy for production.
D) implementation of government-approved systems.

Accepted Answer

The transfer prices used for intra-company product movement play a critical role in establishing a reliable performance system for each subunit or division, especially when partially-produced products are being transferred across national borders. Transfer pricing refers to the pricing method used to determine the value of goods or services transferred between different divisions of the same company. The choice of transfer price can impact the profitability of both the selling and buying divisions, and it can also influence their behavior and decision-making. Therefore, determining appropriate transfer prices is crucial for ensuring that each division is evaluated fairly and that the overall goals of the company are achieved.

Question 10

Measuring the success of a divisional Investment Center is closely tied to understanding whether or not the division meets profit expectations. To understand profits, two alternatives are proposed for tracking profitability: ROA and EVA. From the point of view of an economist, why is EVA usually preferred?

Accepted Answer

The answer of Measuring the success of a divisional Investment...

Question 11

If a corporation operates two divisions that supply one another, and each division is located in a different country, then transfer prices are:
A) set to allocate profit to the low tax rate country.
B) set to allocate all costs to the low tax rate country.
C) set to allocate profit to the high tax rate country.
D) not allowed between most countries.

Accepted Answer

Transfer prices are set to allocate profit to the low tax rate country in order to minimize the overall tax liability of the corporation. This practice is known as transfer pricing and is commonly used by multinational corporations to minimize their tax burden. It is important to set transfer prices at arm's length, meaning they are at fair market value, to avoid scrutiny from tax authorities.

Question 12

The accounting department had a plumbing problem and they called the maintenance department to fix this. After the job was done, the maintenance department sent the accounting department a bill for services rendered. Does this make sense? After all they are all a part of the same company?

Accepted Answer

The answer of The accounting department had a plumbing problem...

Question 13

Always Round Tire's new division, Start-up Batteries, finds they have a Total Cost curve: TC = 300 + 2Q + 2Q² and a Demand curve: P = 130 - 2Q. If the division is operated as an independent Profit Center, what will be the price and quantity sold each day? Will the division make a profit? If the division is operated purely a Revenue Center, how many batteries will they sell each day? If the division is operated as a Cost Center and told to produce 20 batteries per day, what would be the cost per battery?

Accepted Answer

The answer of Always Round Tire's new division, Start-up Batteries,...

Question 14

One of the reasons that many corporations adopt the M-form of business structure is that it allows for:
A) movement of decision rights to each division.
B) the elimination of unethical incentive programs.
C) companies to separate complementary product lines.
D) a vertical chain of command in each business function.

Accepted Answer

The M-form structure allows for movement of decision rights to each division, which gives them more autonomy and flexibility to operate efficiently. This is achieved by creating separate divisions or units that are responsible for specific functions within the organization, and each has its own decision-making authority. This structure enables the organization to respond quickly to changing market conditions and customer preferences while also providing a clear line of accountability for each division's performance.

Question 15

What are the common transfer pricing methods?

Accepted Answer

The answer of What are the common transfer pricing methods?...

Question 16

What is transfer pricing?

Accepted Answer

The answer of What is transfer pricing?...

Question 17

Clearly, an economist would like to see a profit center implement a system that most closely approximates the rule of profit maximization, MR = MC, in building a system of prices for other divisions. What are the pluses and minuses of allowing a division to engage in this type of activity?

Accepted Answer

The answer of Clearly, an economist would like to see...

Question 18

Economists regularly make hostile comments about accounting data. It is purely historical. It is aggregated. It doesn't segment by levels of capacity usage. It often is not formatted for information on incremental change. So why is it the key data source for decision control and important in decision management?

Accepted Answer

The answer of Economists regularly make hostile comments about accounting...

Question 19

If a company division is operated as Revenue Center and its demand curve is P = 200 - 2Q, how many units should it produce per day?
A) 0
B) 25
C) 50
D) 100

Accepted Answer

In order to determine the optimal output level for this revenue center, we need to find the quantity where marginal revenue equals marginal cost. In this case, we do not have information about the cost of production, so we can use the rule of thumb that profit is maximized where marginal revenue equals marginal cost.

The marginal revenue can be found by taking the derivative of the demand function with respect to quantity:

MR = dP/dQ = 200 - 4Q

Setting MR equal to zero, we get:

0 = 200 - 4Q

4Q = 200

Q = 50

Therefore, the revenue center should produce 50 units per day to maximize profits.

Question 20

If final demand is P = 220 - 5Q and MC = 20, then explain the problem of successive monopoly transfer pricing showing the different outcomes if (1) the product is priced and sold in a single organization firm as opposed to (2) a firm with a manufacturing division and a sales/distribution division, both of which are given total independent control over pricing.

Accepted Answer

The answer of If final demand is P = 220...

Quiz 17: Divisional Performance Evaluation

A cost center can be asked to achieve one of two typical objectives. A cost center can either minimize costs for a given output or it can:

One of the problems of transfer prices comes from the successive impact of the prices as the product moves downstream toward the consumer. At each step the transfer price becomes the ____________ for the next part of the company.

If there exists an external market for an intermediate good produced by a company, then an easy way to set the set a transfer price would be to use:

What are the measures of performance for investment centers? How do they work?

If each division of a company with a monopoly niche is allowed to set its transfer price at the profit-maximizing level for the next division as the product flows toward the consumer (assuming no external market for the product) , then prices will:

Transfer prices or charge-back prices are ________ of most businesses.

Many firms have to transfer partially-produced products among its divisions, often across national borders. One the key issues in establishing a reliable performance system for each subunit or division is the:

If a corporation operates two divisions that supply one another, and each division is located in a different country, then transfer prices are:

The accounting department had a plumbing problem and they called the maintenance department to fix this. After the job was done, the maintenance department sent the accounting department a bill for services rendered. Does this make sense? After all they are all a part of the same company?

One of the reasons that many corporations adopt the M-form of business structure is that it allows for:

What are the common transfer pricing methods?

What is transfer pricing?

Clearly, an economist would like to see a profit center implement a system that most closely approximates the rule of profit maximization, MR = MC, in building a system of prices for other divisions. What are the pluses and minuses of allowing a division to engage in this type of activity?

If a company division is operated as Revenue Center and its demand curve is P = 200 - 2Q, how many units should it produce per day?