Exam 17: Divisional Performance Evaluation

If a company has two profit centers where one supplies the other with necessary ingredients to a company product, and if the relationship between two centers is clearly inimical to company success, then:

If a company division is operated as Revenue Center and its demand curve is P = 200 - 2Q, how many units should it produce per day?

Measuring the success of a divisional Investment Center is closely tied to understanding whether or not the division meets profit expectations. To understand profits, two alternatives are proposed for tracking profitability: ROA and EVA. From the point of view of an economist, why is EVA usually preferred?

In general, the use of accounting systems performance analysis is more effective in:

What is transfer pricing?

Economists regularly make hostile comments about accounting data. It is purely historical. It is aggregated. It doesn't segment by levels of capacity usage. It often is not formatted for information on incremental change. So why is it the key data source for decision control and important in decision management?

If a corporation operates two divisions that supply one another, and each division is located in a different country, then transfer prices are:

One of the problems of transfer prices comes from the successive impact of the prices as the product moves downstream toward the consumer. At each step the transfer price becomes the ____________ for the next part of the company.

The basic incentive problem associated with internal transfers is:

The CEO of Always Round Tire has decided to open a battery division. He thinks that batteries would sell well with tires at their outlets AND that Always Round's quality reputation will be transferred to the batteries. Should he set up the new division as a Revenue Center, as a Profit Center, or as an Investment Center? Why?

If final demand is P = 220 - 5Q and MC = 20, then explain the problem of successive monopoly transfer pricing showing the different outcomes if (1) the product is priced and sold in a single organization firm as opposed to (2) a firm with a manufacturing division and a sales/distribution division, both of which are given total independent control over pricing.

In the Celtex case study, Leo Garcia, President of the synthetic chemical division, regularly fails to sell his products to and through the consumer products division. This is because:

In terms of using accounting data to build an effective management control system, what is the nirvana fallacy?

The choice of transfer-pricing method:

One of the reasons that many corporations adopt the M-form of business structure is that it allows for:

Holmstrom and Tirole note "The economist's first instinct is to set transfer price equal to marginal cost." However, a distinct plurality of companies uses the full-cost method. That is because: