Question 1

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

Accepted Answer

A)  required by federal law 
B)  typical 
C)  unusual 
D)  only part of the international component 
A)  required by federal law 
B)  typical 
C)  unusual 
D)  only part of the international component B

Question 2

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

Using a calculus approach, marginal cost is the first derivative of TC: MC = 2 + 4Q. From the demand curve, we know that MR = 130 - 4Q. Setting MR=MC and solving for Q yields the profit maximizing output of Q= 16 batteries per day. To sell this quantity of batteries the price should be $98 per battery. The resulting total cost will be $844 per day and total revenue $1,568, yielding a profit.
If the division operates as a Revenue Center, it will maximize total revenue. Assuming it has pricing authority, the division will choose a price and output accordingly. Maximum total revenue occurs at an output where MR = 0, or 130-4Q = 0, or Q=32.5 batteries. If the division operates as a cost center with a target of Q=20, TC = 300 + 2(20) + 2(20)² = $1,140. The cost per battery is $1,140/20 = $57.

Question 3

Full-cost transfer pricing frequently:

Accepted Answer

A)  understates the opportunity costs of external transfers. 
B)  overstates the opportunity costs of external transfers. 
C)  understates the opportunity costs of internal transfers. 
D)  overstates the opportunity costs of internal transfers. 
A)  understates the opportunity costs of external transfers. 
B)  overstates the opportunity costs of external transfers. 
C)  understates the opportunity costs of internal transfers. 
D)  overstates the opportunity costs of internal transfers. D

Question 4

Which one of the following is not a method to set transfer prices?

Accepted Answer

A)  market price 
B)  marginal production cost 
C)  full cost 
D)  opportunity cost 
A)  market price 
B)  marginal production cost 
C)  full cost 
D)  opportunity cost

Question 5

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:

Accepted Answer

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. 
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.

Question 6

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 calle

Question 7

You can manufacture a product in the US and transfer it to Europe. In the MC = $3 per unit, and the market price in Europe is $5 per unit. Should you manufacture the unit or not?

Accepted Answer

A)  No, the net receipt of $5 is larger than the MC in the US. 
B)  Yes, the gross receipt of $3 is larger than the MC in the US. 
C)  No, the net receipt of $3 is the same as the MC in the US. 
D)  Yes, the net receipts in Europe exceed MC in the US. 
A)  No, the net receipt of $5 is larger than the MC in the US. 
B)  Yes, the gross receipt of $3 is larger than the MC in the US. 
C)  No, the net receipt of $3 is the same as the MC in the US. 
D)  Yes, the net receipts in Europe exceed MC in the US.

Question 8

Transfer price refers to the price at which:

Accepted Answer

A)  goods are being transferred from one location to another. 
B)  services are being transferred overseas for a cheaper rate. 
C)  goods are sold to loyal customers without shipping and delivery cost. 
D)  goods and services are transferred within a business. 
A)  goods are being transferred from one location to another. 
B)  services are being transferred overseas for a cheaper rate. 
C)  goods are sold to loyal customers without shipping and delivery cost. 
D)  goods and services are transferred within a business.

Question 9

MC transfer prices creates incentives for manufacturing to distort MC:

Accepted Answer

A)  upwards and then downwards. 
B)  downwards and then upwards. 
C)  downwards. 
D)  upwards. 
A)  upwards and then downwards. 
B)  downwards and then upwards. 
C)  downwards. 
D)  upwards.

Question 10

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:

Accepted Answer

A)  market-based transfer prices. 
B)  marginal cost transfer prices. 
C)  full-cost transfer prices. 
D)  success monopoly transfer prices. 
A)  market-based transfer prices. 
B)  marginal cost transfer prices. 
C)  full-cost transfer prices. 
D)  success monopoly transfer prices.

Question 11

You can manufacture a product in the US and transfer it to Europe. In the MC = $3 per unit, and the market price in Europe is $5 per unit. Should you manufacture the unit or not?

Accepted Answer

A)  Yes, the total net gain is $5 from selling in Europe. 
B)  No, MC of $3 has to be forgone. 
C)  No, the net receipt of $3 is the same as the MC in the US. 
D)  Yes, the net receipts in Europe exceed MC in the US. 
A)  Yes, the total net gain is $5 from selling in Europe. 
B)  No, MC of $3 has to be forgone. 
C)  No, the net receipt of $3 is the same as the MC in the US. 
D)  Yes, the net receipts in Europe exceed MC in the US.

Question 12

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:

Accepted Answer

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. 
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.

Question 13

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

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. 
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.

Question 14

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

Accepted Answer

There are two commonly used measures of

Question 15

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:

Accepted Answer

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. 
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.

Question 16

Full-cost transfer pricing creates an incentive for:

Accepted Answer

A)  distribution to be inefficient. 
B)  distribution to be over-efficient. 
C)  manufacturing to be over-efficient. 
D)  manufacturing to be less efficient. 
A)  distribution to be inefficient. 
B)  distribution to be over-efficient. 
C)  manufacturing to be over-efficient. 
D)  manufacturing to be less efficient.

Question 17

Which one of the following is not a method to set transfer prices?

Accepted Answer

A)  market price 
B)  marginal production cost 
C)  negotiated pricing 
D)  opportunity cost 
A)  market price 
B)  marginal production cost 
C)  negotiated pricing 
D)  opportunity cost

Question 18

What are the common transfer pricing methods?

Accepted Answer

There are four different methods for set

Question 19

If a company adds up all the costs of producing an intermediate product - direct labor, materials, and overhead - to establish a transfer price, then it is using:

Accepted Answer

A)  market-based transfer prices. 
B)  marginal cost transfer prices. 
C)  full-cost transfer prices. 
D)  success monopoly transfer prices. 
A)  market-based transfer prices. 
B)  marginal cost transfer prices. 
C)  full-cost transfer prices. 
D)  success monopoly transfer prices.

Question 20

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 mos

Exam 17: Divisional Performance Evaluation

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

Full-cost transfer pricing frequently:

Which one of the following is not a method to set transfer prices?

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:

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?

You can manufacture a product in the US and transfer it to Europe. In the MC = $3 per unit, and the market price in Europe is $5 per unit. Should you manufacture the unit or not?

Transfer price refers to the price at which:

MC transfer prices creates incentives for manufacturing to distort MC:

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:

You can manufacture a product in the US and transfer it to Europe. In the MC = $3 per unit, and the market price in Europe is $5 per unit. Should you manufacture the unit or not?

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:

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

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:

Full-cost transfer pricing creates an incentive for:

Which one of the following is not a method to set transfer prices?

What are the common transfer pricing methods?

If a company adds up all the costs of producing an intermediate product - direct labor, materials, and overhead - to establish a transfer price, then it is using:

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?

Introduction

Economists View of Behavior

Markets, Organizations, and the Role of Knowledge

Demand

Production and Cost

Market Structure

Pricing With Market Power

Economics of Strategy: Creating and Capturing Value

Economics of Strategy: Game Theory

Incentive Conflicts and Contracts

Organizational Architecture

Decision Rights: The Level of Empowerment

Decision Rights: Bundling Tasks Into Jobs and Subunits

Attracting and Retaining Qualified Employees

Incentive Compensation

Individual Performance Evaluation

Corporate Governance

Vertical Integration and Outsourcing

Leadership: Motivating Change Within Organizations

Understanding the Business Environment: The Economics of Regulation

Ethics and Organizational Architecture

Organizational Architecture and the Process of Management Innovation

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