Question 1

The transfer of intermediate products or services among divisions is usually managed through a transfer-pricing system.

Accepted Answer

Transfer pricing is a system used to determine the value of goods and services that are exchanged between different divisions or subsidiaries within a company. It helps to ensure that the transfer of intermediate products or services is done at a fair market value and not at an artificial price that may benefit one division or subsidiary over the other. Therefore, the statement is true.

Question 2

Discuss the role of accounting measures of divisional performance,identify three different standards of comparison that can be used when evaluating the accounting performance of a division along with the strengths and weaknesses of each standard,and describe the potential weaknesses of accounting measures of divisional performance.

Accepted Answer

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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 SpandoCorp decides to use the method of allocating capital where each project receives funding on its merit and not because it received funding the previous year,it is using
A)zero-based budgeting.
B)corporate budgeting.
C)centralized budgeting
D)coordinated budgeting.

Accepted Answer

Zero-based budgeting is a method of budgeting where each project or activity must justify its funding from scratch every budget cycle. This means that all projects must demonstrate that they are worth the investment, regardless of whether they were previously funded. In contrast, corporate budgeting typically allocates a set budget to each division or department, regardless of whether their projects are truly worth the investment. Centralized budgeting and coordinated budgeting are not applicable to this scenario, as they refer to different methods of budgeting that involve more central control over the budgeting process.

Question 4

To the extent that a firm exploits real economies of scope in implementing a diversification strategy,it will be able to unambiguously evaluate the performance of individual divisions in that firm.

Accepted Answer

Economies of scope can lead to shared resources and synergies across divisions, making it challenging to isolate and evaluate the performance of individual divisions due to interdependencies.

Question 5

Traditionally,the compensation of corporate managers in a diversified firm has been only loosely connected to the firm's economic performance.

Accepted Answer

This statement is true. Historically, managers in a diversified firm were compensated based on a variety of factors, such as experience, seniority, and industry norms, rather than directly tied to the performance of the firm. However, in recent years, there has been a trend towards linking executive compensation more closely to the firm's financial performance.

Question 6

If a well-managed diversified firm uses both accounting and economic measures,it will be able to unambiguously evaluate divisional performance.

Accepted Answer

Using both accounting and economic measures provides a more comprehensive view of divisional performance, but it does not guarantee unambiguous evaluation due to differences in how these measures account for costs, revenues, and investments, as well as potential conflicts between short-term and long-term performance indicators.

Question 7

Discuss the relationship between accounting methods of measuring divisional performance and economic methods,identify the formula used for calculating economic value added,and discuss methods for adjusting accounting earnings and the importance of making these adjustments.

Accepted Answer

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Question 8

An important study on executive compensation found that differences in CEO cash compensation is not very responsive to differences in firm performance even if a substantial percentage of the CEO's compensation came in the form of stock and stock options in the firm.

Accepted Answer

The answer of An important study on executive compensation found...

Question 9

Intermediate products or services are those products or services that are produced in one division of a diversified firm that are used as inputs by another division.

Accepted Answer

This statement defines intermediate products or services accurately.

Question 10

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's board of directors wanted to ensure that changes in the CEO's compensation would be closely linked to changes in the firm's performance,it should
A)use a compensation package that includes only a salary for the CEO.
B)use a compensation package that includes a salary and a cash bonus for the CEO.
C)use a compensation package the includes a salary,a cash bonus and stock options that represent only a relatively small percentage of the CEO's total compensation package.
D)use a compensation package that includes a salary and stock options that represent a relatively substantial percentage of the CEO's total compensation package.

Accepted Answer

By using a compensation package that includes a salary and stock options that represent a relatively substantial percentage of the CEO's total compensation package, the board of directors would ensure that changes in the CEO's pay are closely linked to changes in the firm's performance. This is because the stock options give the CEO a direct financial stake in improving the company's performance, as they will be more valuable if the stock price goes up. This aligns the interests of the CEO with those of the equity holders, and so provides an effective way of linking executive compensation to the firm's performance.

Question 11

In a diversified firm,market prices are set by a firm's corporate management to accomplish corporate objectives while transfer prices are determined by the market forces of supply and demand.

Accepted Answer

In a diversified firm, both market prices and transfer prices are set by the firm's corporate management to accomplish corporate objectives.

Question 12

In choosing which transfer pricing system to use,a firm should be less concerned about finding the "right" transfer-pricing mechanism and be more concerned about choosing a transfer-pricing policy that creates the fewest management problems.

Accepted Answer

A firm should prioritize a transfer-pricing policy that results in minimal management issues, rather than searching for the "perfect" transfer-pricing system. The emphasis should be on developing a workable policy that is well-understood and accepted by all parties involved.

Question 13

Discuss the role of transfer pricing systems in an M-form organization,identify difficulties with setting optimal prices,and identify four alternative transfer pricing schemes.

Accepted Answer

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Question 14

It is unusual for a diversified firm to change its transfer-pricing mechanisms every few years in an attempt to find the "right" transfer-pricing mechanism.

Accepted Answer

It is not unusual for a diversified firm to change its transfer-pricing mechanisms every few years in an attempt to find the "right" transfer-pricing mechanism. This is because there are many factors that can affect the appropriateness of a transfer-pricing mechanism, such as changes in market conditions or government regulations. Additionally, different types of transactions may require different transfer-pricing mechanisms. Therefore, it is not uncommon for companies to periodically review and adjust their transfer-pricing methods.

Question 15

Discuss the importance of compensation policies in diversified firms and identify the CEO compensation package that most closely aligns the interests of the CEO with those of stockholders.

Accepted Answer

The answer of Discuss the importance of compensation policies in...

Question 16

Transfer prices should equal opportunity cost.

Accepted Answer

Transfer prices should equal opportunity cost because the company should not lose or earn any profit within the organization. It ensures that each department is treated fairly and that resources are allocated efficiently.

Question 17

Which of the following statements regarding CEO compensation is accurate?
A)Differences in CEO cash compensation are very responsive to differences in firm performance.
B)If a substantial percentage of a CEO's compensation comes in the form of stock and stock options in the firm,changes in compensation are closely linked with changes in firm performance.
C)If a substantial percentage of a CEO's compensation comes in the form of stock and stock options in the firm,changes in compensation are not closely linked with changes in firm performance.
D)If a substantial percentage of a CEO's compensation comes in the form of salary,changes in compensation can be expected to be closely linked with changes in firm performance.

Accepted Answer

This statement is accurate because if a substantial percentage of a CEO's compensation comes in the form of stock and stock options in the firm, changes in compensation are closely linked with changes in firm performance. This is because the CEO's financial interests are tied to the performance of the firm, making them more motivated to make decisions that will benefit the company in the long run. CEO cash compensation is not as closely linked to firm performance because it often includes fixed salaries and bonuses that are not dependent on the company's performance.

Question 18

In zero-based budgeting,each project has to stand on its own merits each year by being included among the important projects that a firm can afford to fund and no project receives funding for the future simply because it received funding in the past.

Accepted Answer

This statement accurately describes the principles of zero-based budgeting, where each project must be justified and evaluated annually based on its individual merits and contribution to the overall strategic goals and priorities of the organization. Previous funding or support for a project is not presumed or guaranteed, and each proposal must be treated as a new financial and operational investment decision.

Quiz 10: Organizing to Implement Corporate Diversification