Exam 8: Pricing of Joint Products and Transfer Pricing

Buster Brown shoes and McAn Shoes is a vertically integrated shoe manufacturer and shoe retail firm. Shoe retail is highly competitive. The optimal transfer price of shoes from Buster Brown to McAn Shoes is:

Transfer pricing:

Joint products are:

Transfer prices in a multiproduct divisionalized firm:

Transfer pricing can cause unhappiness within a firm because:

Universal Foods sells can goods to grocery stores and uses some of the can goods at the corporate cafeteria. The cafeteria is a profit center. Canned green beans are sold to Kroger's Grocery Stores at 90¢ for a 32-oz. can. The Universal Foods cafeteria wants to 'pay' only 30¢ for the can. As the arbitrator in this dispute, you decide to:

The solution for an optimum combination of joint products produced in variable proportions requires a point of tangency between the ____.

Economists argue that the optimal transfer price is one that represents:

Washington Instrument produces various electronic products including electronic calculators. The marketing division (m) of the company purchases the integrated circuits used in the calculators, manufactures the various other components (e.g., case, batteries, buttons, etc.), and then assembles and distributes the final calculators under its own brand name (MBA-Whiz). The integrated circuits are produced by a separate production (p) division of the firm. The production division can sell the integrated circuits in the competitive open market at a standard price of $1.50/unit. Likewise, the marketing division can purchase integrated circuits in this market at $1.50/unit. The demand function for this particular calculator is:Q_m = 1350 -50P_mwhere Q_m is quantity sold per month and P_m is the price per unit. The marginal cost function of the calculators (excluding the cost of the integrated circuit) is:MC_m = .0025Q_mThe marginal cost function of the production division for these integrated circuits is:MC_P = .00375Q_pwhere Q_p is the quantity of integrated circuits produced per month. (a)Determine the profit-maximizing price and outlet level of calculators for the marketing division. (b)Determine the profit-maximizing price and output level of integrated circuits for the production division. (c)Determine the optimal intracompany transfer price for integrated circuits. (d)Determine the number of integrated circuits the production division should sell (i)internally to the marketing division and (ii) externally on the open market. (e)Determine the number of integrated circuits the marketing division should buy (i)internally from the production division and (ii) externally on the open market.

If the IRS didn't keep a good watch on transfer pricing, international transfer pricing could lead to loss of corporate profits taxes in the US are much higher than the Cayman Islands. If a firm owns a Cayman Island distributorship, it can buy US products and resell them from the Cayman Islands. To minimize firm-wide corporate taxation (and if it were not required to use arm's length pricing), then:

A vertically integrated firm produces both a specialized computer chip and the consumer toy that uses this chip. No external market exists for the computer chip. The management teams of both divisions receive bonuses that are dependent on the internal profits generated within their respective divisions. The toy division prefers a ____ transfer price, while the computer chip division prefers a ____ transfer price.

____ products are technically ____ in the production process.

With a perfectly competitive external market for an intermediate product, the optimal transfer price for intracompany transfers of the intermediate product (between the production and marketing departments) is equal to the ____.

In the pricing of multiple products with independent demands, the Equal Marginal Revenue (EMR) line is determined by the intersection of a firm's MC curve and: