Exam 13: Investment Centers and Transfer Pricing

The following information relates to the Atlas Division of Global Enterprises: Interest rate on debt capital: 8% Cost of equity capital: 12% Market value of debt capital: $50 million Market value of equity capital: $80 million Income tax rate: 30% On the basis of this information,Atlas's weighted-average cost of capital is closest to:

The ROI is:

Sahara Corporation has no excess capacity.If the firm desires to implement the general transfer-pricing rule,opportunity cost would be equal to:

Green Auto's Northern Division is currently purchasing a part from an outside supplier.The company's Southern Division,which has no excess capacity,makes and sells this part for external customers at a variable cost of $19 and a selling price of $31.If Southern begins sales to Northern,it (1)will use the general transfer-pricing rule and (2)will be able to reduce variable cost on internal transfers by $3.On the basis of this information,Southern would establish a transfer price of:

A division's return on investment may be improved by increasing:

The maximization of profits of the buying division is one of the goals that should be pursued when setting transfer prices.

Return on investment (ROI)is a very popular tool to evaluate performance.The measurement of ROI is dependent,in part,on whether fixed assets are valued at acquisition cost or net book value. List several advantages of acquisition cost and net book value as ways to value long-lived assets.

To partially eliminate the problems that are associated with the short-term focus of return on investment,residual income,and EVA,the performance of a division's major investments is commonly evaluated through:

General Auto's Northern Division is currently purchasing a part from an outside supplier.The company's Southern Division,which has excess capacity,makes and sells this part for external customers at a variable cost of $19 and a selling price of $31.If Southern begins sales to Northern,it (1)will use the general transfer-pricing rule and (2)will be able to reduce variable cost on internal transfers by $3.On the basis of this information,Southern would establish a transfer price of:

When an organization allows divisional managers to be responsible for short-term loans and credit,the division's invested capital should be measured by

Excel Division reported a residual income of $200,000 for the year just ended.The division had $8,000,000 of invested capital and $1,000,000 of income.On the basis of this information,the imputed interest rate was:

The following information relates to the Cliff Division of Mountain Enterprises: Income for the period just ended: $1,500,000 Invested capital: $12,000,000 If the company has an imputed interest rate of 11%,Cliff's residual income would be:

The following information relates to Hudston,Inc.: If the company has a 10% weighted-average cost of capital,its economic value added would be:

The sales margin is:

Which of the following transfer-pricing methods can lead to dysfunctional decision-making behavior by managers?

The income calculation for a division manager's ROI should be based on:

The biggest challenge in making a decentralized organization function effectively is:

The market value of Glenwood's debt and equity capital totals $180 million,80% of which is equity related.An analysis conducted by the company's finance department revealed a 7% after-tax cost of debt capital and a 10% cost of equity capital.On the basis of this information,Glenwood's weighted-average cost of capital:

Consider the following statements about transfer pricing: I.Income taxes and import duties are an important consideration when setting a transfer price for companies that pursue international commerce. II.Transfer prices cannot be used by organizations in the service industry. III.Transfer prices are totally cost-based in nature,not market-based. Which of the above statements is (are)true?

Cheney Corporation produces goods in the United States,to be sold by a separate division located in Italy.More specifically,the Italian division imports units of product X34 from the U.S.and sells them for $950 each.(Imports of similar goods sell for $850. )The Italian division is subject to a 40% tax rate whereas the U.S.tax rate is only 30%.The manufacturing cost of product X34 in the United States is $720.Furthermore,there is a 10% import duty computed on the transfer price that will be paid by the Italian division and is deductible when computing Italian income. Tax laws of the two countries allow transfer prices to be set at U.S.manufacturing cost or the selling prices of comparable imports in Italy. Required: Analyze the profitability of the U.S.division,the Italian division,and Cheney as a whole to determine if the overall corporation would be better off if transfers took place at (1)U.S.manufacturing cost or (2)the selling price of comparable imports.