Deck 8: Pricing of Joint Products and Transfer Pricing

Question 1

Transfer pricing:

A) is typical of a centralized firm
B) assumes no external sources available
C) should maximize a division's profits, rather than the firm's
D) can exist with or without an external competitive market
E) none of the above

Answer 1

can exist with or without an external competitive market

Question 2

Transfer prices in a multiproduct divisionalized firm:

A) serve as a measure of the marginal value of resources employed when making price-output decisions that will maximize profits
B) cannot be determined whenever one division sells its products both internally to another division and externally in a perfectly competitive market
C) serves as a measure of the overall value of the resources employed in the division when analyzing the performance of the division
D) a and c only
E) a, b, and c

Answer 2

a and c only

Question 3

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:

A) the marginal cost curve for the first product profitably produced
B) the marginal revenue curve for the last product profitably produced
C) the marginal revenue curve for the first product profitably produced
D) the marginal cost curve for the last product profitably produced
E) none of the above

Answer 3

the marginal revenue curve for the last product profitably produced

Question 4

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

A) isocost and marginal revenue curves
B) isocost and isorevenue curves
C) isorevenue and marginal cost curves
D) marginal cost and marginal revenue curves
E) none of the above

Question 5

Joint products are:

A) products which are technically independent in the production process
B) exemplified by beef and hide from cattle
C) products whose production processes are interdependent
D) a and b
E) b and c

Question 6

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 ____.

A) production department's marginal cost
B) production department's total cost
C) competitive market price
D) competitive market price plus cost of capital
E) none of the above

Question 7

____ products are technically ____ in the production process.

A) Alternative; independent
B) Joint; interdependent
C) a and b
D) none of the above

Question 8

Transfer pricing can cause unhappiness within a firm because:

A) the internal sellers want to sell items internally at low prices.
B) the internal buyers want to buy items internally at high prices.
C) the internal sellers want to sell items at higher prices than the internal buyers want to pay.
D) only government workers are happy.

Question 9

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

A) the average cost of the item based on standard costing.
B) the competitive price that would be available without a vertically integrated firm.
C) the optimal monopoly price based on P (1 + 1/E) = MC.
D) the total cost, including coverage of some of the overhead costs.

Question 10

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:

A) pretend to be Solomon and split the difference, because that is optimal.
B) decide to go with 30¢, because it is critical that the cafeteria shows as much profit as possible.
C) decide to go with 90¢, because that reflects the closest to a competitive market price for canned green beans.

Question 11

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:

A) whatever the shoe manufacturer could sell shoes to other retail shoe stores
B) a price that is somewhat lower that the price it could sell shoes to other retail shoe stores
C) a price that is somewhat higher than the price it could sell to other retail shoe shore

Question 12

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.

A) low, low
B) low, high
C) high, low
D) high, high

Question 13

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) Use a high transfer price to sell products to the Cayman Island to minimize US taxes.
B) Use a low transfer price to sell products to the Cayman Island to minimize US taxes.
C) It will not matter what transfer price it uses to minimize US taxes.

Question 14

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.