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Unformatted text preview: CHAPTER 11 INVESTMENT CENTER PERFORMANCE EVALUATION Questions, Exercises, Problems, and Cases: Answers and Solutions 11.1 See text or glossary at the end of the book. 11.2 Transfer prices exist in centralized organizations to record the transfer of goods and services from one unit to another for the same reasons such organizations allocate costs (e.g., inventory valuation, cross-department monitoring). 11.3 Market-based transfer pricing is considered optimal under many circumstances, because it preserves divisional autonomy, yet encourages division managers to make economically optimal decisions for the company, when divisions operate at capacity. 11.4 The limitations of market-based transfer prices exist when the market price does not reflect the opportunity cost of the goods and services, for example if idle capacity is present. Also, temporary short-run fluctuations in market prices could lead to suboptimal long-run decisions. But the key limitation is that market prices are often not readily available. 11.5 The advantages of a centrally administered transfer price are that it promotes short-run profits by ensuring proper action by divisional managers and allows division managers to maintain their autonomy. The disadvantages of such a transfer price are that top management will become too involved in pricing disputes, and that division managers will lose flexibility in their decision making. The company also loses the other advantages of decentralization. 11.6 Companies often use prices other than market prices for interdivisional transfers because (1) market prices may not be available, (2) market prices can lead to suboptimal behavior when the supplier division has idle capacity, or (3) the company is not otherwise indifferent between internal and external buying. 11.7 The disadvantages of a negotiated transfer price system are that a great deal of management effort may be used on the negotiating process and that the negotiated price may be based more upon the manager's ability to negotiate rather than other factors. 11-1 Solutions 11.8 This occurs when the benefits of an action to one division are more than offset by harmful effects to another division. For example, the sale of a critical component by one division to outside customers rather than to another division may be harmful to the company as a whole if the second division cannot obtain the component from other sources....
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This note was uploaded on 01/11/2012 for the course ACCT 202 taught by Professor Terru during the Spring '11 term at NYU.
- Spring '11