ROI, RI & Transfer Pricing

Question 1

ROI stands for

Answer 1

return on investment

Question 2

ROI is also known as…

Answer 2

ROCE or RONA

Question 3

ROI calculation?

Answer 3

controllable profit / capital employed

Question 4

advantages of ROI

Answer 4

widely used and accepted

should facilitate comparisons - especially between divisions of different sizes

Question 5

disadvantages of ROI?

Answer 5

relative measure

different accounting policies can make comparisons different

can lead to dysfunctional decision making

Question 6

RI?

Answer 6

residual income

Question 7

RI calculation?

Answer 7

controllable profit - (capital employed * target% return)

Question 8

what is RI?

Answer 8

income leftover after deducting capital employed, after it’s been multiplied by the target% return

Question 9

what is good about RI?

Answer 9

less likely to lead to dysfunctional decisions (unlike ROI)

Question 10

transfer price?

Answer 10

the price at which one division in a group sells its products/services to another division within the same group

e.g., division A produces and sells a component to division B who modifies the component and sells it to a consumer

Question 11

impact of transfer price on divisional profitability?

Answer 11

transfer price set will have an impact on the share of the profit that the two divisions make for the work performed

can impact taxation if divisions are in separate countries (e.g., VAT, CT)

can impact decision making

Question 12

methods for setting a transfer price?

Answer 12

• cost plus pricing
• opportunity cost
• negotiated prices
• two part tariff
• dual pricing
• market prices

Question 13

when selecting a transfer price, what must be considered?

Answer 13

• goal congruence
• combined tax liabilities
• performance measurement