Question 1

Transfer price refers to the price at which:

Accepted Answer

Transfer price refers to the price at which goods and services are transferred within a business. This price is determined for internal purposes and is not based on market conditions. The purpose of transfer pricing is to allocate costs and revenues between different divisions or departments in a company.

Question 2

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

MR = MC will drive a division to its most efficient production level,all else constant.However,this ignores possible linkages between divisions.For example,if a higher MR for an upstream division yields a higher MC for a downstream division,as in some transfer pricing scenarios,the value of the firm will decrease.One solution is to centrally control transfer prices to minimize negative impacts of an upstream division on a downstream division.

Question 3

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

No,this is not strange.These are called charge-backs.The maintenance department sent its workers to the accounting department instead of working elsewhere for actual payment.So their opportunity cost has to be borne by the accounting department.

Question 4

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.

Accepted Answer

The answer of One of the problems of transfer prices...

Question 5

Consider a particular division that earns an after-tax profit of $40 million and has total assets worth $120 million.The residual income of the division is ______ if its required cost of capital is 20%.

Accepted Answer

Residual income is calculated as the after-tax profit minus the product of the total assets and the required rate of return. Here, it's $40 million - ($120 million * 20%) = $40 million - $24 million = $16 million.

Question 6

Refer to Figure 17.1.Which of these will hold true if the manager is given a budget of $155?

Accepted Answer

According to the graph, producing 8 units of output will use up the entire budget of $155 while still maximizing output. Producing more units will result in higher average costs and lower profits, while producing fewer units will not use up the entire budget and will result in lower output and lower profits. So, the manager should produce 8 units of output to maximize output for the budget.

Question 7

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 8

Always Round Tire's new division,Start-up Batteries,finds that its total cost curve,TC = 300 + 2Q + 2Q² and its 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 as 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,finds that...

Question 9

Economists often remark that accounting data are purely historical and at an aggregate level and do not provide information on incremental changes.So why is it the key data source for decision control and important in decision management?

Accepted Answer

The answer of Economists often remark that accounting data are...

Question 10

The CEO of Always Round Tires 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 answer of The CEO of Always Round Tires has...

Question 11

Which of these is a commonly used measure of performance for investment centers?

Accepted Answer

Residual income is a commonly used measure of performance for investment centers because it takes into account both the profit earned and the capital invested in the center, which is important for measuring the return on investment. Total assets and total income do not necessarily reflect the profitability or efficiency of the center, and variable cost is only one aspect of measuring performance.

Question 12

What is transfer pricing?

Accepted Answer

The answer of What is transfer pricing?...

Question 13

Cost center managers are evaluated on their efficiency in using an input-mix to:

Accepted Answer

Cost center managers are typically evaluated on their ability to efficiently use the resources allocated to them to produce a specific level of output. This means that they are expected to use the input-mix provided to them in the most efficient way possible, to produce the desired level of output with the lowest possible resource consumption. The other options (B, C, and D) are not typically used to evaluate cost center managers, as their responsibilities generally do not include generating revenue, net profit, or return on investment.

Question 14

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

Accepted Answer

To determine the optimal production quantity, we need to set marginal revenue (MR) equal to marginal cost (MC). The marginal revenue can be found by taking the derivative of the demand function:
MR = d(P)/dQ = 200 - 4Q
The marginal cost function is not provided, so we cannot solve for the exact quantity. However, we can set MR equal to MC and make an informed estimate. Assuming a typical downward-sloping marginal cost curve, 50 units per day is a reasonable production quantity that would maximize profits. At this output level, we set MR = MC = $100. Consequently, the company should produce 50 units per day in order to maximize profits.

Question 15

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?

Accepted Answer

The investment has a lower ROA (15%) than the current portfolio's ROA (20%). Adding it would dilute the overall return, reducing it to below the current 20%, even though it's above the company's required 12%.

Question 16

Refer to Figure 17.1.What is the output level where the average cost is at its minimum?

Accepted Answer

The answer of Refer to Figure 17.1.What is the output...

Question 17

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

Accepted Answer

Transfer prices can be set to allocate profit to the low tax rate country as a strategy to minimize the overall tax burden of the corporation. This is because by allocating more profit to the division in the lower tax rate country, the corporation can reduce the amount of taxes it pays on those profits.

Question 18

Profit center managers are allocated decision rights for:

Accepted Answer

The answer of Profit center managers are allocated decision rights...

Question 19

What are the common transfer pricing methods?

Accepted Answer

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

Question 20

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...

Quiz 17: Divisional Performance Evaluation