The case describes the transfer pricing ("adjustment rate") system at Caja Espana. a)Use the adjustment rates in Exhibit 6 to calculate the profit of the Gradefes and Madrid-Barrio de Salamanca branches, according to the procedure described in the profitability analysis section of the case.

For these calculations assume the following: All mortgages are one-year adjustable-rate mortgages, and all term deposits have a three month maturity.

Standard costs:

Branch manager50,000

Controller40,000

Commercial Officers 25,000

Gradefes clients are mainly depositors who use the ATM network intensively and visit other branches with relative frequency. Madrid-Barrio de Salamanca is located in a commercial area of Madrid and is often used by customers of other branches (mainly from other provinces) while they shop in the area. For these reasons, Gradefes is a net payer of services to other branches for 30,000, and Madrid-Barrio de Salamanca received a net 20,000 from the rest of the branch network in 2002.

For corporate services, branches are charged a flat annual fee of 12,000 and a "usage" fee equal to 10 per customer of the branch.

The Treasury charges the branches 4.01% (the 10-year government bond rate) for their cash balance.