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Chapter 19 - Strategic Performance Measurement—Investment Centers
Total Cost per Unit = $1,000 $1,200 $1,900
5. First and foremost, the transfer pricing method chosen must be legally acceptable in each of the
countries involved. Second, the impact of the transfer pricing policy on tariffs and import duties needs
19-54 (Continued-4)
a) Are there any currency controls that the foreign government(s) would be able to apply in order to
prevent the type of tax planning illustrated above in (3) and (4)?
b) Does the transfer price approximate an external "arm's length" market price?
c) Would it be worthwhile for to company to secure an "advanced pricing agreement" (APA) with the
foreign government(s) affected by the transfer pricing decision?
d) In the absence of an established market price (i.e., estimate of a selling price in a comparable
arm's length transaction), can the transfer price selected be justified on the basis of an
appropriate measure of "cost" plus a reasonable markup?
e) Would it be worthwhile to increase tax payments to a country as evidence of "good citizenship"?
f) Would the company gain in the long run by having subunit managers negotiate the transfer price,
rather than having the transfer price determined on the basis of a formula?
19-97
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Chapter 19 - Strategic Performance Measurement—Investment Centers
CHECK FIGURES
19-21 ROS: Division X = 10%; Division Y = 10%; Sales, Division Z = $3,750,000; Income, Division Z
19-27 1. ROI: Soap Products Division, 5.42%; Skin Lotions Division, 8.33%; Hair Products Division,
19-29 No check figure available
19-30 No check figure available
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Chapter 19 - Strategic Performance Measurement—Investment Centers
19-33 Net Cost (Benefit) if Division A buys outside = ($550,000) (i.e., total cost savings to the firm
would equal $550,000).
Year 2 = ($24,000); Year 3 = $91,200.
19-37 1. Estimated IRR = 19.44% (using built-in function in Excel); 2. ROIs: Year 1 = 6.67%; Year 2 =
22.00%; Year 3 = 72.80%. 3. ROIs using Present-Value Depreciation: Year 1 = 19.44%; Year 2
= 19.44%; Year 3 = 19.44%. 4. Residual Income (RI): Year 1 = $7,083; Year 2 = $5,627; Year 3
= $3,416. Estimated NPV of proposed investment = $13,655.
19-38 No check figure available.
19-39 No check figure available.
19-40 No check figure available.
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Chapter 19 - Strategic Performance Measurement—Investment Centers
19-46 No check figure available.
19-47 1. $1,350 per unit. 3. Likely range of transfer prices: between $1,350 and $1,875 per unit.
19-48 No check figure available.
19-49 1. The best decision in the interest of Division B is NOT to sell the 25,000 units to Division A (by
selling internally Division B’s operating income would decrease by $275,000); 2. Likely range of
19-101
