Question

1 - Setting transfer prices can be especially problematic when:

a) Managers are evaluated based on non-financial factors

b) Compensation is tied to the financial performance of responsibility centres

c) Centralized decision-making is the organizational norm

d) Compensation is tied to the financial performance of the organization as a whole

2. A transfer pricing policy based on market price:

a) Maximizes total organizational profit

b) Is best because the market price is always objective and easily obtainable

c) May result in suboptimal decision-making for the company as a whole

d) Is the only alternative accepted by the Canada Revenue Agency

Answer 1

1.The correct option is B

Setting transfer prices can be especially problematic when Compensation is tied to the financial performance of responsibility centres.

If transfer prices are based on the pay of the employees then the remunerations of employees in each responsibility centre will be affected by the changes in the profits caused by the transfer price.This will ultimately lead to low morale and unfair wages.Thats why to set up a transfer price in which a way so that the performance of the responsibility centre doesn't affect the company morale becomes difficult.

2.The correct option is C

A transfer pricing policy based on market price May result in suboptimal decision-making for the company as a whole.

As per Market based transfer pricing policy, the price that will be paid between divisions of same company(transfer price) will be determjned based on market prices i.e, the price that would-be paid if goods were bought in open market

Though it is the easiest method it might result in not so perfect( not high quality/optimal) business decisons because the markets are not in our hands and there is no objective way in  determining the market prices .

Hence this method might lead to taking suboptimal decison making which might not be profitable for the organization as a whole.