When the Target Firm Is an Operating Division of a Larger

question 82

True/False

When the target firm is an operating division of a larger firm, it is common for the parent to provide services to the target at below market prices. In calculating the target's standalone value, it is necessary to subtract the difference between the market price of these services and actual cost paid to the parent from the target firm's net income.

---

Definitions:

Unit Product Cost

The total cost (both variable and fixed) associated with producing a unit of product, including materials, labor, and overhead.

Variable Costing

Accounting method that considers only variable costs (costs that change with production volume) in the calculation of product cost, excluding fixed costs.

Variable Costing

An accounting approach where only variable production costs (direct materials, direct labor, and variable manufacturing overhead) are included in product costs, with fixed overhead treated as a period expense.

Unit Product Cost

The total cost associated with producing a single unit of product, including direct materials, direct labor, and allocated overhead.