Use the following information for the next 3 questions.
Chicago Division has a required rate of return of 15%. The weighted average cost of capital is 10%. Information for Chicago Divisions operations over the past 2 years follows.
-Which of the following is most likely to be an example of an agency cost caused by incongruent goals?
A) Employee time working in a target costing team
B) Loss on a special order because of unanticipated production problems
C) Managers' time to negotiate a transfer price
D) Decline in sales from a change in consumer preferences

Question

Use the following information for the next 3 questions.
Chicago Division has a required rate of return of 15%. The weighted average cost of capital is 10%. Information for Chicago Divisions operations over the past 2 years follows. 
-Which of the following is most likely to be an example of an agency cost caused by incongruent goals?
A) Employee time working in a target costing team 
B) Loss on a special order because of unanticipated production problems 
C) Managers' time to negotiate a transfer price 
D) Decline in sales from a change in consumer preferences

Quizplus · Accepted Answer

Agency costs arise when there is a conflict of interest between principals (owners) and agents (managers). Managers negotiating a transfer price may prioritize their own departmental goals over the company's overall profitability, leading to agency costs due to incongruent goals.

Use the Following Information for the Next 3 Questions