Reference no: EM132542155

Question 1: What would be a legitimate reason for upper management to insist on an internal transfer even though the product could be sourced outside the company at a price that is lower than the company's variable cost?

Option 1: Management is concerned that its manufacturing equipment will soon be obsolete, and it wants to get full use out of it before it happens.

Option 2: Management wants to ensure a secure supply of the product.

Option 3: The company has excess capacity.

Option 4: There is never a legitimate reason that justifies an internal transfer if a product can be sourced outside the company at a price that is lower than the company's variable cost.

Question 2: What should be the objective(s) of a firm's transfer pricing policy?

Option 1: Ensure a secure source of inputs at the best price possible.

Option 2: Promote goal congruence, while maintaining divisional autonomy so that accurate performance evaluation can be made.

Option 3: Develop a cooperative relationship between divisions, while maintaining enough competitiveness to ensure the survival of the firm.

Option 4: Develop a pricing system that facilitates good record keeping that is acceptable under GAAP.

Question 3: Generally, a transfer of products between two divisions should take place if it

Option 1: allows one division to benefit from technology developed in another division.

Option 2: results in increased incremental income to the company as a whole.

Option 3: increases awareness within the company of activity in the various divisions.

Option 4: assists the management to evaluate performance of the divisions.