Question 1

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

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 value of the CEO's compensation is directly tied to the value of the company's stock, and therefore, the CEO has a strong incentive to work towards increasing the stock price and improving the company's performance. Studies have also found that CEO compensation packages that include more stock options are associated with higher firm performance.

Question 2

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 single hurdle rate as a standard of evaluating the performance of a division ignores important differences in performance that might exist across divisions. This means that divisions with very different operational structures and risk levels will be evaluated in the same way, potentially leading to unfair comparisons and inaccurate assessments of performance.

Question 3

When compared to the strategy implementation responsibilities of senior executives in U-form organizations, when implementing strategy, division general managers in M-form organizations
A) tend to have to deal with less conflict.
B) have to compete for external capital funding.
C) tend to have to deal with substantially more conflict.
D) must cooperate with other divisions to exploit corporate economies of scope.

Accepted Answer

Division general managers in M-form organizations must cooperate with other divisions to exploit corporate economies of scope. This requires coordination and negotiation among division leaders, potentially leading to conflict. Additionally, these managers may also need to compete for internal capital funding, making their implementation responsibilities more complex than those of senior executives in U-form organizations.

Question 4

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 of a multidivisional company sells its products or services to another division. This price is set by the corporate management and is used to accomplish corporate objectives. Choices A and C are not accurate because the allocation price refers to the method of allocating costs within a single division, and market price refers to the price at which a product or service is sold to an external customer. Choice B is a vague term that does not specifically refer to the price at which one division sells to another.

Question 5

In an M-form organization, the management of day-to-day operations is delegated to
A) divisional general managers and corporate staff managers.
B) corporate staff managers and functional managers who report to corporate staff managers.
C) divisional general managers and functional managers who report to division general managers.
D) the board of directors and corporate staff managers who report to the board of directors.

Accepted Answer

In an M-form organization, which stands for multidivisional form, the management of day-to-day operations is delegated to divisional general managers and functional managers who report to division general managers. This allows for decentralized decision making and greater flexibility in responding to local market conditions. Corporate staff managers in such an organization provide support and guidance to the divisional general managers and ensure that the overall strategy is aligned with the goals of the organization. Option A is incorrect because corporate staff managers do not manage day-to-day operations in an M-form organization. Option B is incorrect because functional managers do not report directly to corporate staff managers in an M-form organization. Option D is incorrect because the board of directors is responsible for overseeing the management of the organization, but they do not manage day-to-day operations.

Question 6

A(n) ________ occurs when a large, typically diversified firm divests itself of a business in which it has historically been operating and the divested business operates as an independent unit.
A) harvest
B) liquidation
C) initial public offering
D) corporate spin-off

Accepted Answer

A corporate spin-off is the process of a large company creating a new, independent company through the sale or distribution of new shares of an existing business or division of the company. The newly independent unit can operate separately from the parent company, giving it greater autonomy and potentially unlocking additional value for shareholders. Harvest typically refers to maximizing profits from an existing business, liquidation involves selling off all assets to pay creditors, and an initial public offering is the first sale of a company's stock to the public.

Question 7

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

The budgeting process described is called zero-based budgeting. Zero-based budgeting involves starting from scratch every budget cycle and considering all expenses, rather than just adjusting the previous budget. In this process, all allocation requests are ranked and funded based on priority rather than maintaining funding for certain projects simply because they were funded in the past.

Question 8

When the cost of services from a shared activity is ________ the cost of comparable services provided by a division itself or by an outside supplier than the division, general managers have a strong incentive ________.
A) less than; to use the services of shared activities
B) greater than; to use the services of shared activities
C) less than; to use the services of an outside supplier
D) equal to; to use the services of an outside supplier

Accepted Answer

When the cost of services from a shared activity is less than the cost of comparable services provided by a division itself or by an outside supplier than the division, general managers have a strong incentive to use the services of shared activities as it would result in cost savings for the division.

Question 9

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

The answer of When adjusting a division's accounting earnings for...

Question 10

________ is an economic measure of divisional performance.
A) Return on assets
B) Return on a division's sales
C) Economic value added
D) A division's growth rate

Accepted Answer

Economic value added (EVA) is a widely used measure of divisional or organizational performance. It is calculated as the division's net operating profit after taxes minus the cost of the funds invested in the division's assets. This measure provides insight into how well a division is generating profits given the resources it has at its disposal. Option A (Return on assets) measures the profitability of assets but does not take into account the cost of capital invested in them. Option B (Return on a division's sales) is a simple measure of profitability but does not consider the cost of running the division. Option D (A division's growth rate) is a measure of how fast the division is expanding but does not provide insight into how profitable the division is.

Question 11

A ________ exists when a large, typically diversified firm divests itself of a business in which it has historically been operating and the divested business operates as an independent entity.
A) corporate spin-off
B) franchise
C) division
D) subsidiary

Accepted Answer

A corporate spin-off refers to the divestment of a business by a large, diversified firm in which the divested business operates as an independent entity. This allows the firm to focus on its core business, while the divested business can potentially grow and operate more efficiently as a standalone entity.

Question 12

The divided loyalties that divisional staff managers have between corporate staff managers and functional managers is potentially the most problematic in ________ staff functions.
A) marketing
B) accounting
C) logistics
D) production

Accepted Answer

The answer of The divided loyalties that divisional staff managers...

Question 13

Rather than having profit-and-loss responsibilities, ________ are assigned a budget and manage their operations to that budget.
A) profit centers
B) cost centers
C) operation centers
D) functional centers

Accepted Answer

Cost centers are assigned a budget and their main role is to control costs and manage their operations within that budget. They do not have profit-and-loss responsibilities. Profit centers, on the other hand, are responsible for both revenue and costs and are expected to generate profits. Operation centers and functional centers are not typically used as management designations.

Question 14

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

Accepted Answer

Transfer pricing refers to the amount of money charged by one division of a company to another division for goods or services provided. The goal is to establish a fair market price to ensure that both divisions are profitable. It should equal the opportunity cost, which is the amount a division could earn by selling its products outside the company. This ensures that the selling division is compensated for its production costs and that the buying division is paying a fair market price for its goods or services.

Question 15

________ have full profit-and-loss responsibility and typically have multiple functional managers reporting to them.
A) Division general managers
B) Corporate staff managers
C) Senior executives
D) Shared activity managers

Accepted Answer

Division general managers are responsible for the profit and loss of a specific division or business unit within a company. They typically have functional managers reporting to them, such as marketing, finance, and operations, and are responsible for making strategic decisions to ensure the success of their division. Corporate staff managers, senior executives, and shared activity managers may have some level of responsibility for profit and loss, but it is not typically their primary focus.

Question 16

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 focus on short-term financial results, rather than long-term strategies, which can lead to a bias towards short-term decision making.

Question 17

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 18

IPO stands for
A) internal product offering.
B) internal price orders.
C) international product orders.
D) initial public offering.

Accepted Answer

IPO stands for "initial public offering" which is a type of offering where a company offers its shares to the public for the first time, allowing them to become shareholders in the company.

Question 19

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

The answer of If a division of a multidivisional firm...

Question 20

A business unit within a diversified firm may be sold to the public through a(n)
A) corporate spin-off.
B) liquidation.
C) IPO.
D) harvest strategy.

Accepted Answer

Selling a business unit to the public through an initial public offering (IPO) is a common way for diversified firms to divest part of their business. A corporate spin-off involves creating a new, independent company to take over the business unit, while liquidation involves selling off assets and shutting down operations. A harvest strategy involves maximizing cash flow rather than divesting entirely.

Quiz 8: Organizing to Implement Corporate Diversification

Which of the following statements regarding CEO compensation is accurate?

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

When compared to the strategy implementation responsibilities of senior executives in U-form organizations, when implementing strategy, division general managers in M-form organizations

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.

In an M-form organization, the management of day-to-day operations is delegated to

A(n) ________ occurs when a large, typically diversified firm divests itself of a business in which it has historically been operating and the divested business operates as an independent unit.

When the cost of services from a shared activity is the cost of comparable services provided by a division itself or by an outside supplier than the division, general managers have a strong incentive .

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

________ is an economic measure of divisional performance.

A ________ exists when a large, typically diversified firm divests itself of a business in which it has historically been operating and the divested business operates as an independent entity.

The divided loyalties that divisional staff managers have between corporate staff managers and functional managers is potentially the most problematic in ________ staff functions.

Rather than having profit-and-loss responsibilities, ________ are assigned a budget and manage their operations to that budget.

Transfer pricing should equal

________ have full profit-and-loss responsibility and typically have multiple functional managers reporting to them.

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

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?

IPO stands for

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 business unit within a diversified firm may be sold to the public through a(n)