Question Details

When an industry has excess capacity, market prices may drop well 




THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 1 AND 2.
Division A sells soybean paste internally to Division B, which in turn, produces soybean burgers that sell for $5 per pound. Division A incurs costs of $0.75 per pound while Division B incurs additional costs of $2.50 per pound. 

1.	What is Division A's operating income per pound, assuming the transfer price of the soybean paste is set at $1.25 per pound? 
	a.	$0.500
	b.	$0.875
	c.	$1.250
	d.	$1.625

	
2.	Which of the following formulas correctly reflects the company's operating income?
	a.	$5.00 - ($0.75 + $2.50) = $1.75
	b.	$5.00 - ($1.25 + $2.50) = $1.25
	c.	$5.00 - ($0.75 + $3.75) = $0.50
	d.	$5.00 - ($0.25 + $1.25 + $3.50) = 0

	3.	Transferring products or services at market prices generally leads to optimal decisions when
	a.	the market for the intermediate product is perfectly competitive.
	b.	the interdependencies of the subunits are minimal.
	c.	there are no additional costs or benefits to the company in buying or selling in the external market.
	d.	all of the above are needed for optimal decisions.

		

4.	A benefit of using a market-based transfer price is
	a.	the profits of the transferring division are sacrificed for the overall good of the corporation.
	b.	the profits of the division receiving the products are sacrificed for the overall good of the corporation.
	c.	the economic viability and profitability of each division can be evaluated individually.
	d.	none of the above.

5.	Optimal corporate decisions do NOT result
	a.	when goods or services are transferred at market prices.
	b.	when goods or services are transferred at full-cost prices.
	c.	when goods or services are transferred at variable-cost prices.
	d.	for either (b) or (c).

		

6.	When an industry has excess capacity, market prices may drop well below their historical average. If this drop is temporary, it is called 
	a.	distress prices.
	b.	dropped prices.
	c.	low-average prices.
	d.	substitute prices.





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