1.  What is fully-distributed cost pricing?

2.  Why might fully-distributed cost pricing not be profitable?  Instead -- what should a firm look at when decided to add a new product to it's line, for example?

3.  Assume the common costs for Barb's Barber Shop are $450 per month.  Barb has been distributing these costs across all of her barbers (she has 5 -- so they all have common costs of $90 each per month).  She is trying to decide if she should add another barber.  The marginal cost of adding the barber would be $50 per month.  Assume the maximum price a barber will pay to work in her shop is $65 month.

a.  If she uses fully-distributed cost pricing -- how much would she have to charge the barber to make it worth her while to add him? Is this feasible?

b.  If she used the marginal cost or incremental cost of adding the barber -- how much would she have to charge the barber and would this be a better pricing scheme?  If so - why?

6.  What is transfer pricing?  Relate transfer pricing to the concept of "profit centers."  When is the pricing decision "easy" with respect to a transfer price?  When it is not easy and why?

7.  One way of deciding on a transfer price is to look at total MC and MR of the final output.  What is this pricing criteria?  Can you draw the graph that goes along with your explanation?

8.  Discuss another way of determining a transfer price.

9.  Some argue that multinational corporations use transfer pricing to avoid paying taxes.  Why is this argument made?  Explain.

10.  What are a couple of downsides to transfer pricing?

11.  Do you have any other questions over this material?