Question 1

Which of the following is a weakness of using a hurdle rate as a standard of evaluating the performance of a division?
A)The process is time-consuming.
B)The process is fraught with political intrigue.
C)This approach lets other firms determine what is and what is not excellent performance for a division within a diversified firm.
D)The use of such a single standard ignores important differences in performance that might exist across divisions.

Accepted Answer

The use of a hurdle rate as a single standard for evaluating division performance does not take into consideration the differences in performance that may exist across divisions. It assumes that all divisions operate in the same way and have the same goals, which may not be the case in reality. This can result in incorrect or unfair evaluations of division performance.

Question 2

Most accounting measures of divisional performance have a common limitation in that they
A)have a short-term bias.
B)are costly to implement.
C)are difficult to interpret.
D)have a long-term bias.

Accepted Answer

Most accounting measures of divisional performance tend to focus on short-term results rather than long-term sustainability or strategic planning. This short-term bias can limit their effectiveness in assessing the overall health and success of a division.

Question 3

SpandoCorp is a diversified firm that makes industrial, military and consumer products from Spandex. SpandoCorp manages each of the businesses that it operates in as a separate division and treats each as a true profit-and-loss center. In this organization, Grace McKenna is responsible for deciding which set of businesses SpandoCorp will operate in and for encouraging behavior that is consistent with this strategy, Wells Tucker provides information to McKenna about the internal and external environments that she uses in her decision making, and Kelly Rae is one of the individuals who is responsible for evaluating the firm's decision making to ensure that it is consistent with the interests of equity holders.
-If the bulk materials division of SpandoCorp sold its reams of Spandex to the military division and set the transfer price of these reams equal to the bulk materials actual cost of production,SpandoCorp would be using the ________ transfer pricing scheme.
A)exchange autonomy
B)mandated full cost
C)mandated market based
D)dual pricing

Accepted Answer

Mandated full cost transfer pricing scheme is used when a division transfers goods or services to another division, and the transfer price is set equal to the actual cost of producing the goods or services, including direct costs and a share of indirect costs. In this scenario, the bulk materials division is setting the transfer price based on its actual cost of production, which is consistent with the mandated full cost transfer pricing scheme.

Question 4

SpandoCorp is a diversified firm that makes industrial, military and consumer products from Spandex. SpandoCorp manages each of the businesses that it operates in as a separate division and treats each as a true profit-and-loss center. In this organization, Grace McKenna is responsible for deciding which set of businesses SpandoCorp will operate in and for encouraging behavior that is consistent with this strategy, Wells Tucker provides information to McKenna about the internal and external environments that she uses in her decision making, and Kelly Rae is one of the individuals who is responsible for evaluating the firm's decision making to ensure that it is consistent with the interests of equity holders.
-If SpandoCorp used a ________ budgeting process,it would assume that no project would receive funding for the future simply because it was funded in the past and would require each project to stand on its own merits each year to be included in a list of important projects that the firm can afford to fund.
A)zero-based
B)cost plus
C)dynamic
D)traditional

Accepted Answer

Zero-based budgeting assumes that each project must justify its funding each year, rather than receiving automatic funding simply because it was funded in the past. This approach is consistent with SpandoCorp's treatment of each of its businesses as a separate profit-and-loss center, and would require each project to stand on its own merits to be included in the list of important projects that the firm can afford to fund.

Question 5

Economic theory tells us that transfer prices should equal ________ cost.
A)marginal
B)variable
C)fixed
D)opportunity

Accepted Answer

The answer of Economic theory tells us that transfer prices...

Question 6

Some scholars suggest that the search for optimal transfer pricing should be abandoned in favor of setting transfer pricing as a(n)________ process.
A)negotiation
B)arbitrary
C)conflict resolution
D)marketing

Accepted Answer

The answer of Some scholars suggest that the search for...

Question 7

SpandoCorp is a diversified firm that makes industrial, military and consumer products from Spandex. SpandoCorp manages each of the businesses that it operates in as a separate division and treats each as a true profit-and-loss center. In this organization, Grace McKenna is responsible for deciding which set of businesses SpandoCorp will operate in and for encouraging behavior that is consistent with this strategy, Wells Tucker provides information to McKenna about the internal and external environments that she uses in her decision making, and Kelly Rae is one of the individuals who is responsible for evaluating the firm's decision making to ensure that it is consistent with the interests of equity holders.
-If SpandoCorp wanted to measure the performance of its divisions with a method that would minimize any potential short-term bias,it should use a(n)
A)hurdle rate based measure of divisional performance.
B)divisional budget based measure of performance.
C)economic value added measure of divisional performance.
D)measure of performance based on the average level of profitability of firms in a division's industry.

Accepted Answer

Economic value added is a performance measure that takes into account not only the division's profitability but also the cost of capital, which provides a long-term perspective and minimizes short-term bias. This is the best choice for SpandoCorp to measure the performance of its divisions. Hurdle rate based measure and divisional budget based measure may encourage short-term thinking, while measuring performance based on the industry average profitability may not be suitable for SpandoCorp's diversified businesses.

Question 8

In a multidivisional company,one division "sells" its products or services to a second division for a(n)________,which is set by a firm's corporate management to accomplish corporate objectives.
A)allocation price
B)transfer cost
C)market price
D)transfer price

Accepted Answer

The transfer price is the price at which one division sells its products or services to another division within the same company. This price is determined by corporate management and is used to accomplish the company's overall objectives. Therefore, the correct choice is D) transfer price.

Question 9

Transfer pricing should equal
A)selling price.
B)opportunity cost.
C)total cost.
D)marginal cost.

Accepted Answer

Transfer pricing should equal the opportunity cost, which is the potential revenue that could be earned from selling the product internally to another division or externally to a third party. This ensures that each division is fairly compensated and encourages efficiency in resource allocation. Selling price, total cost, and marginal cost do not accurately reflect the true value of the product and can lead to suboptimal decision-making.

Question 10

Economic methods of divisional performance in a diversified firm build on accounting methods but adjust those methods to incorporate short-term investments that may generate long-term benefits.

Accepted Answer

Economic methods of divisional performance in a diversified firm do build on accounting methods but also consider short-term investments that may result in long-term benefits. This allows for a more comprehensive evaluation of each division's performance within the overall company.

Question 11

One of the strengths of using a hurdle rate to measure the performance of divisions in a diversified firm is that if the corporation has a single hurdle rate,there is little ambiguity about the performance objectives of divisions.

Accepted Answer

This statement is true. When a corporation has a single hurdle rate, all divisions are measured against the same standard, which eliminates any ambiguity or confusion about what the performance objectives are for each division. This allows for more effective performance evaluation and decision-making at the corporate level.

Question 12

If a division of a multidivisional firm has adjusted accounting earnings of $10 million,a weighted average cost of capital of 10% and a total capital employed by the division of $50 million,the division has an EVA of
A)$25 million.
B)$5 million.
C)$15 million.
D)$20 million.

Accepted Answer

Economic Value Added (EVA) is calculated as the net operating profit after taxes minus a charge for the opportunity cost of the capital invested. In this case, EVA = ($10 million - (10% of $50 million)) = $10 million - $5 million = $5 million.

Question 13

In ________ budgeting,corporate executives create a list of all capital allocation requests from divisions in a firm,rank them from "most important" to "least important" and then fund all the projects a firm can afford,given the amount of capital that is available and no project receives funding simply because it was funded in the past.
A)cost-plus
B)activity-based
C)zero-based
D)revenue-based

Accepted Answer

This describes the zero-based budgeting approach, where all projects start from a baseline of zero and are then ranked in order of importance. This approach ensures that funding decisions are based on the current needs and priorities of the company, rather than simply continuing to fund projects that were funded in the past.

Question 14

Only accounting measures of performance can be used in accurately measuring the performance of divisions within a diversified firm.

Accepted Answer

Accounting measures of performance may provide valuable information, but they do not necessarily capture all aspects of divisional performance. Other measures, such as customer satisfaction, product innovation, and employee engagement, may also be important in accurately measuring divisional performance within a diversified firm.

Question 15

Most accounting measures of divisional performance focus on long-term benefits and minimize the possibility of a short-term bias.

Accepted Answer

Many accounting measures of divisional performance may focus on short-term benefits, such as quarterly earnings or cost savings, rather than the long-term viability and growth of the division. This can create a short-term bias in decision-making and may not accurately reflect the overall success of the division in the long run.

Question 16

Under which transfer pricing scheme is the transfer price set equal to the selling division's actual cost of production or set equal to the cost of production if the selling division were operating at maximum efficiency?
A)exchange autonomy
B)mandated full cost
C)mandated market based
D)dual pricing

Accepted Answer

The answer of Under which transfer pricing scheme is the...

Question 17

Economic measures of divisional performance in a diversified firm compare a division's performance with a firm's cost of capital and these measures increase the potential for gaming,which is generally minimized by accounting measures.

Accepted Answer

Economic measures of divisional performance, such as Economic Value Added (EVA), are designed to align a division's performance more closely with the overall firm's objectives, including its cost of capital. While any performance measure can potentially be gamed, economic measures aim to reduce gaming by focusing on real value creation rather than accounting profits, which can be more easily manipulated through accounting choices. Accounting measures, on the other hand, might not fully capture the cost of capital or the economic value created, and thus could potentially offer more opportunities for gaming through accounting practices.

Question 18

Which of the following is not an alternative transfer-pricing scheme?
A)exchange autonomy
B)mandated full cost
C)solo pricing
D)mandated market based

Accepted Answer

The answer of Which of the following is not an...

Question 19

When adjusting a division's accounting earnings for use in the economic value added calculations,R&D spending is usually
A)subtracted from the division's performance.
B)depreciated over the life of the average R&D projected and subtracted from the division's performance.
C)amortized over the life of the average R&D projected and added back to the division's performance.
D)added back into the division's performance.

Accepted Answer

R&D spending is an investment in the future growth of the company, as such, it should be added back into the division's performance for economic value added calculation.

Question 20

By adjusting for a division's earnings and accounting for the cost of investing in a division,economic value added is a much more accurate estimate of a division's economic performance than are traditional accounting measures of performance.

Accepted Answer

Economic value added (EVA) is a financial performance metric that accounts for the cost of capital and measures a company's true economic profit or loss. EVA is superior to traditional accounting measures like net income or earnings per share because it adjusts for the cost of investing in a division, which traditional accounting measures do not account for. This allows for a more accurate estimation of a division's economic performance.

Quiz 10: Organizing to Implement Corporate Diversification

Which of the following is a weakness of using a hurdle rate as a standard of evaluating the performance of a division?

Most accounting measures of divisional performance have a common limitation in that they

Economic theory tells us that transfer prices should equal ________ cost.

Some scholars suggest that the search for optimal transfer pricing should be abandoned in favor of setting transfer pricing as a(n) ________ process.

In a multidivisional company,one division "sells" its products or services to a second division for a(n) ________,which is set by a firm's corporate management to accomplish corporate objectives.

Transfer pricing should equal

Economic methods of divisional performance in a diversified firm build on accounting methods but adjust those methods to incorporate short-term investments that may generate long-term benefits.

One of the strengths of using a hurdle rate to measure the performance of divisions in a diversified firm is that if the corporation has a single hurdle rate,there is little ambiguity about the performance objectives of divisions.

If a division of a multidivisional firm has adjusted accounting earnings of $10 million,a weighted average cost of capital of 10% and a total capital employed by the division of $50 million,the division has an EVA of

Only accounting measures of performance can be used in accurately measuring the performance of divisions within a diversified firm.

Most accounting measures of divisional performance focus on long-term benefits and minimize the possibility of a short-term bias.

Under which transfer pricing scheme is the transfer price set equal to the selling division's actual cost of production or set equal to the cost of production if the selling division were operating at maximum efficiency?

Economic measures of divisional performance in a diversified firm compare a division's performance with a firm's cost of capital and these measures increase the potential for gaming,which is generally minimized by accounting measures.

Which of the following is not an alternative transfer-pricing scheme?

When adjusting a division's accounting earnings for use in the economic value added calculations,R&D spending is usually

By adjusting for a division's earnings and accounting for the cost of investing in a division,economic value added is a much more accurate estimate of a division's economic performance than are traditional accounting measures of performance.