Question 1

Transfer pricing is a complex issue.

Accepted Answer

Transfer pricing involves setting prices for goods, services, or intellectual property transferred between different entities within a multinational corporation. It can be a complex issue because the prices can have significant tax implications and can be used for tax avoidance, which has led to increasing scrutiny and regulations by tax authorities around the world.

Question 2

A ____________________ is a segment of the business whose manager is accountable for specific sets of activities.

Accepted Answer

The answer of A ____________________ is a segment of the...

Question 3

Several transfer pricing policies are used in practice.These transfer pricing policies include market price, cost-based transfer prices, and negotiated transfer prices.

Accepted Answer

This statement is true. These three transfer pricing policies are commonly used in practice. Market price refers to the price of a good or service that is available in an open market. Cost-based transfer prices involve determining the cost of producing a good or service and adding a markup. Negotiated transfer prices involve setting a price through negotiation between the two parties involved in the transfer.

Question 4

In _______________ decision making, decisions are made at the very top level, and lower-level managers are charged with implementing these decisions.

Accepted Answer

The answer of In _______________ decision making, decisions are made...

Question 5

In negotiated transfer pricing, the selling division sets the ceiling (maximum possible transfer price) for the bargaining range.

Accepted Answer

In negotiated transfer pricing, both the selling and buying divisions negotiate and agree upon a transfer price within a bargaining range that is determined by each division's cost and market conditions. There is no pre-determined ceiling or floor for the bargaining range in negotiated transfer pricing.

Question 6

The selling division is forced to transfer a product internally when a cost-based transfer pricing policy is set by top management.

Accepted Answer

Neither division is forced to transfer the product internally.The transfer pricing policy only requires that if the product is transferred, it must be at cost.

Question 7

A transfer price is the price charged for a component by the selling division to the buying division of the same company.

Accepted Answer

A transfer price is indeed the price charged for a component by the selling division to the buying division of the same company. This is done in order to facilitate internal transactions within the company and ensure that each division is properly accounted for in terms of profitability. The transfer price should be fair and reasonable, and in line with market prices for similar goods or services.

Question 8

A(n) ________________ is when a manager is responsible only for sales.

Accepted Answer

The answer of A(n) ________________ is when a manager is...

Question 9

The selling division would never agree to a transfer price below its full manufacturing cost.

Accepted Answer

The selling division might agree to a transfer price below its full manufacturing cost if the transfer allows the division to utilize spare capacity, contribute to covering fixed costs, or if the internal transfer does not affect its ability to sell products at a higher price in the external market.

Question 10

When the selling division can sell and the buying division can buy externally at the market price, the company as a whole will be in the same position whether or not a market price transfer takes place internally.

Accepted Answer

This is true with regard to revenue, cost and gross profit but perhaps not for all aspects such as production, inventory, etc.

Question 11

In negotiated transfer pricing, the buying division sets the ceiling (maximum possible transfer price) for the bargaining range.

Accepted Answer

In negotiated transfer pricing, the buying division sets the ceiling for the bargaining range because the ceiling represents the maximum price the buying division is willing to pay, often based on the market price or the cost of alternatives.

Question 12

Decentralization usually is achieved by creating units called ___________.

Accepted Answer

The answer of Decentralization usually is achieved by creating units...

Question 13

An ______________________ is when a manager is responsible for revenues, costs and investments.

Accepted Answer

The answer of An ______________________ is when a manager is...

Question 14

If there is a competitive outside market for the transferred product, then the best transfer price is the cost-based transfer price.

Accepted Answer

If there is a competitive outside market for the transferred product, then the best transfer price is the market price.

Question 15

When a manager is responsible for only costs it is known as a(n) _______________.

Accepted Answer

The answer of When a manager is responsible for only...

Question 16

In terms of operating income for the company as a whole, the transfer price set by the buying and selling divisions nets out.

Accepted Answer

The transfer price set by the buying and selling divisions affects the operating income of each division, but it should cancel out at the company level since the profit or loss of one division is offset by the profit or loss of the other division. Therefore, the transfer price shouldn't affect the company's overall operating income.

Question 17

The price charged for the transferred good affects the costs of the buying division and the revenues of the selling division.

Accepted Answer

When a good is transferred between divisions of the same company, it is necessary to determine a transfer price. The transfer price affects both the costs of the buying division and the revenues of the selling division, as they are essentially buying and selling from each other. Therefore, the statement is true.

Question 18

________________ decision making allows managers at lower levels to make and implement key decisions pertaining to their areas of responsibility.

Accepted Answer

The answer of ________________ decision making allows managers at lower...

Question 19

Using EVA to calculate residual income, the dollar cost of capital employed is the actual percentage cost of capital multiplied by the total capital employed.

Accepted Answer

EVA is after-tax operating income minus the dollar cost of capital employed.The dollar cost of capital employed is the actual percentage cost of capital multiplied by the total capital employed.

Question 20

When a product is transferred at market price, the transfer will optimize both divisional and company-wide profits.

Accepted Answer

If there is a competitive outside market for the transferred product, then the best transfer price is the market price.In such a case, divisional managers' actions will simultaneously optimize divisional profits and firmwide profits.

Quiz 11: Performance Evaluation and Decentralization