1. Which of the following is not a source of benefits when a firm buys an essential ingredient to production from an external competitive market rather than producing the ingredient themselves? a.The external firms will be better able to take advantage of economies of scale. b.The external firms will be more efficient at using specific knowledge. c.The external firms are likely to to use the most efficient technology available. d.Buying from external firms is likely to minimize contracting costs.

2. Statement 1: “When a firm chooses the wrong transfer price the allocation of profits is distorted between divisions. While this affects the individual interests of managers in the divisions, it does not affect the over all profitability of the firm.” Statement 2: “A firm with monopoly power in producing a product that is used by multiple industries can sometimes increase its profit by selling the product to the industry with the low demand elasticity and vertically integrating into the industry with the higher demand elasticity.” a.Both statements are true. b.Both statements are false. c.Statement 1 is true but 2 is false. d.Statement 2 is true but 1 is false.

3. Statement 1: “If a division within a firm is a cost center, management may either direct them to maximize the number of satisfactory- quality-units they produce for a given budget, or it may tell them to minimize average total cost. As a general rule, these two strategies will yield equivalent profit for the firm.” Statement 2: “A profit center is the most desirable reward system for an internal division’s managers. Profit, as measured by the company’s accountants, is exactly what the stockholders want the company to maximize. Incentives almost have to be correct.” a.Both statements are true b.Both statements are false c.Statement 1 is true, but 2 is false d.Statement 2 is true, but 1 is false

4. Statement 1: “Investment center managers often are asked to maximize return on assets. This often causes them to be too conservative in the sense that they don’t undertake enough risky projects.” Statement 2: “As a general rule it makes sense to set transfer price to match the price of external providers of the same product or service. This is especially true when there are synergies in production of the ingredient in-house with the production of other goods produced by the firm.” a.Both statements are true. b.Both statements are false. c.Statement 1 is true, and 2 is false. d.Statement 2 is true, and 1 is false.

5. Statement 1: “Full cost transfer prices maximize a firm’s profit. They are especially useful if the firm is a long way from capacity.” Statement 2: “If a manager has full information, he/she will want to set the transfer price of an internally produced good or service at the marginal cost of producing that good or service.” a.Both statements are true. b.Both statements are false. c.Statement 1 is true, but 2 is false. d.Statement 2 it true, but 1 is false.

6. Is the following statement true or false? “A specific asset is a technical term created by economists to describe a durable item that a firm acquires because it provides value in the production of more than one product.”

7. Statement 1: “As a general rule, the correct transfer price between divisions within a firm is most profitably set using the price an outside firm charges for the same item.” Statement 2: “When a firm is at capacity, the marginal cost of production is the theoretically best transfer price if the firm wishes to maximize profit.” a.Statement 1 is correct, but 2 is not. b.Statement 2 is correct, but 1 is not. c.Both statements are correct. d.Neither statement is correct

8. Statement 1: “Managers in expense centers tend to over provide services. That is more service is provided than will maximize the firm’s profit.” Statement 2: “Managers in cost centers that try to minimize average costs will sometimes not be maximizing profit.” a.Both statements are correct. b.Statement 1 is correct, but 2 is false. c.Statement 2 is correct, but 1 is false. d.Both statements are false.