Exam 17: Divisional Performance Evaluation

The CEO of Always Round Tires 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?

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Question 1

Correct Answer:

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The new division should be set up as a profit center.Batteries are a separate product from tires and therefore the division's profitability can be easily measured and rewarded.A revenue center with pricing authority would set a price lower than the profit-maximizing price which would reduce the value of the firm.The CEO should be aware that incentives at the retail level will need to support both tire sales and battery sales.In addition,he should take steps to guard against double markups in transfer pricing from the battery division to the retail outlets.

Full-cost transfer-pricing frequently:

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Question 2

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Cost center managers are evaluated on their efficiency in using an input-mix to:

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Question 3

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Refer to Figure 17.1.What is the output level where the average cost is at its minimum?

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Question 4

Consider a particular division that earns an after-tax profit of $40 million and has total assets worth $120 million.The residual income of the division is ______ if its required cost of capital is 20%.

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Question 5

Which one of the following is not a method used to set transfer prices?

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Question 6

Full-cost transfer-pricing creates an incentive for:

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Question 7

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?

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Question 8

The accounting-based performance analysis:

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Question 9

If a company adds up all the costs of producing an intermediate product - direct labor,materials,and overhead - to establish a transfer price,then it is using a:

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Question 10

Marginal-cost transfer-pricing creates incentives for manufacturing to distort MC:

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Question 11

Clearly,an economist would like to see a profit center implement a system that most closely approximates the rule of profit maximization,MR = MC,in building a system of prices for other divisions.What are the pluses and minuses of allowing a division to engage in this type of activity?

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Question 12

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:

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Question 13

Profit center managers are allocated decision rights for:

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Question 14

You can manufacture a product in the US and transfer it to Europe.If the marginal cost (MC)is $3 per unit,and the market price in Europe is $5 per unit,should the product be manufactured?

(Multiple Choice)

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Question 15

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:

(Multiple Choice)

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Question 16

If there exists an external market for an intermediate good produced by a company,then an easy way to set a transfer price would be to use a:

(Multiple Choice)

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Question 17

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

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Question 18

What are the measures of performance for investment centers? How do they work?

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Question 19

The basic incentive problem associated with internal transfers is that:

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Question 20

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Exam 17: Divisional Performance Evaluation

Full-cost transfer-pricing frequently:

Cost center managers are evaluated on their efficiency in using an input-mix to:

Refer to Figure 17.1.What is the output level where the average cost is at its minimum?

Consider a particular division that earns an after-tax profit of $40 million and has total assets worth $120 million.The residual income of the division is ______ if its required cost of capital is 20%.

Which one of the following is not a method used to set transfer prices?

Full-cost transfer-pricing creates an incentive for:

The accounting-based performance analysis:

If a company adds up all the costs of producing an intermediate product - direct labor,materials,and overhead - to establish a transfer price,then it is using a:

Marginal-cost transfer-pricing creates incentives for manufacturing to distort MC:

Clearly,an economist would like to see a profit center implement a system that most closely approximates the rule of profit maximization,MR = MC,in building a system of prices for other divisions.What are the pluses and minuses of allowing a division to engage in this type of activity?

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:

Profit center managers are allocated decision rights for:

You can manufacture a product in the US and transfer it to Europe.If the marginal cost (MC)is $3 per unit,and the market price in Europe is $5 per unit,should the product be manufactured?

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:

If there exists an external market for an intermediate good produced by a company,then an easy way to set a transfer price would be to use a:

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

What are the measures of performance for investment centers? How do they work?

The basic incentive problem associated with internal transfers is that:

Introduction

Economists View of Behavior

Exchange and Markets

Demand

Production and Cost

Market Structure

Pricing With Market Power

Economics of Strategy: Creating and Capturing Value

Economics of Strategy: Game Theory

Incentive Conflicts and Contracts

Organizational Architecture

Decision Rights: the Level of Empowerment

Decision Rights: Bundling Tasks Into Jobs and Subunits

Attracting and Retaining Qualified Employees

Incentive Compensation

Individual Performance Evaluation

Corporate Governance

Vertical Integration and Outsourcing

Leadership: Motivating Change Within Organizations

Understanding the Business Environment: the Economics of Regulation

Ethics and Organizational Architecture

Organizational Architecture and the Process of Management Innovation

Filters