Q1) What is meant by a “transfer price”? Write down the name and explain three major reasons for using transfer prices.

Q2) Let the following information about a potential project:

Investment required $5,000,000
Expected annual project revenue $7,200,000
Expected annual project expenses $6,400,000
Required rate of return 14%
Current division return on investment 18%

a) Compute project’s return on investment.

b) Based solely on ROI, is this project in firm’s best interests? Explain why or why not?

c) Is this project in division manager’s best interests? Explain why or why not?

d) Carry out DuPont Analysis on this project.

e) Determine the project’s residual income?