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ACCT620Chapter11

ACCT620Chapter11 - CHAPTER11...

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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
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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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