Exam 15: Performance Evaluation and Compensation

Division A of a firm produces a single product, which is sold only to Division B. Division A has a total investment of $1,000,000, while Division B has a total investment of $2,000,000. Division A annually sells 100,000 units of its product to Division B for $5 per unit and earns $150,000 in operating income. Division B currently earns $250,000. If Division A raises its selling price to $6 per unit and nothing else changes,

Executive compensation is typically set by the shareholders at the annual meeting.

Transfer pricing policies can affect a company's tax liability, particularly if it does business internationally.

When decision making is decentralized

Economic value added can be measured so that it reduces most of the problems that arise under residual income.

Residual income measures a company's profits given a required rate of return.

A corporate accounting department would most often be considered a

A transfer price that reduces suboptimal decisions without consuming a lot of time is

Stock-based compensation has been used to encourage

What type of theory provides an analytical framework for the conflicts that arise between owners and managers?

The location of decision authority in an organization depends on

Agency theory is related to accounting because organizations incur costs, including the costs to produce accounting information, to solve conflicts that might arise between managers and owners.

Problems with market-based transfer prices include

Use the following information for the next 2 questions. The Kelso Division produces and sells a product to external and internal customers. Per-unit information about its operations include: -If Kelso is operating at capacity and has unlimited external customer demand, what should be the transfer price for Kelso's product?

Which of the following is an agency cost from a business owner's perspective?

Managers are held responsible for revenues in I. Revenue centers II. Profit centers III. Investment centers

Use the following information for the next 2 questions. The National Division of Roboto Company is buying 10,000 widgets from an outside supplier at $30 per unit. Roboto's Overseas Division, which is producing and selling at full capacity (12,000 units), has the following sales and cost structure: -If the National Division buys its 10,000 widgets from the Overseas Division, the transfer price should be

An organization's chief executive officer can be both a principal and an agent.

An organization's required rate of return is 13%. The ROI of Divisions A and B, respectively, is 10% and 15%. Each Division is considering a project that will have a 12% rate of return. If residual income is used to evaluate divisions, which of the following statements is true?

Choices about decision-making authority and about organizational structure are often related.