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How do companies determine the appropriate profit margin in transfer pricing transactions?

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter10: Evaluating Decentralized Operations

Section: Chapter Questions

Problem 10DQ: When using the negotiated price approach to transfer pricing, within what range should the transfer...

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Discuss the advantages and disadvantages of a market-based transfer pricing approach.
A transfer pricing arrangement that uses the price that would be charged to an external customer is a______. A. market-based approach B. negotiated approach C. cost approach D. decentralized approach
Discuss the advantages and disadvantages of a cost-based transfer pricing approach.
Why might management analyze product profitability?
What is customer value? How is customer value related to a cost leadership strategy? To a differentiation strategy? To strategic positioning?
What does it mean to obtain a competitive advantage? What role does the cost management system play in helping to achieve this goal?
What is meant by a products contribution margin ratio and how is this ratio useful in planning business operations?
Management of Great Springs Bottled Water Company has asked you, the controller, to develop a transfer pricing system for the company. The Transportation Department of the company sells all of its product to the Bottling Department of the company. Thus the Transportation Departments sales become the Bottling Departments cost of goods sold. In order to determine an optimal transfer pricing system, management would like you to demonstrate what an income statement would look like under a cost, market, and negotiated transfer pricing structure. These various transfer prices are listed as follows. Prepare an income statement for each of the transfer prices by filling in the missing numbers in the provided income statement based on each transfer price (thus four different income statements) and calculate the operating income/loss percentage. Prepare a brief summary of the results.