Question 1

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.

Accepted Answer

The description fits the process of zero-based budgeting, where all requests for funding are evaluated based on their necessity and potential return, rather than just being funded because they were previously funded. Cost-plus and revenue-based budgeting methods do not involve ranking allocation requests, while activity-based budgeting is focused on allocating costs to specific activities within a company.

Question 2

Which of the following is not a reason that diversified firms might spin off businesses?

Accepted Answer

This statement is incorrect as businesses that are too related to other firm businesses are often spun off to avoid conflicts of interests or to focus on core competencies. The other three options are common reasons for diversified firms to spin off businesses.

Question 3

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

Accepted Answer

Division general managers generally have full profit-and-loss responsibility and supervise multiple functional managers within their division. Corporate staff managers typically oversee specific functions such as human resources or finance, but do not have full profit-and-loss responsibility. Senior executives can have a variety of responsibilities, but may not necessarily have the same level of hands-on management duties as division general managers. Shared activity managers oversee areas that are used by multiple divisions or functions, but do not necessarily have full profit-and-loss responsibility for those areas.

Question 4

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

Accepted Answer

Cost centers are responsible for managing their costs and expenses within an assigned budget, rather than generating profits. Profit centers, on the other hand, have profit-and-loss responsibilities and are expected to generate revenue and manage their expenses accordingly. Operation and functional centers are not commonly used terms in this context.

Question 5

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

Accepted Answer

Division general managers in M-form organizations must cooperate with other divisions to exploit corporate economies of scope. Unlike U-form organizations, M-form organizations have multiple divisions, each with its own set of capabilities and resources that can be leveraged to create synergies across the entire corporation. This requires division general managers to collaborate with each other to ensure the successful implementation of corporate strategy, which can sometimes lead to conflict. Additionally, division general managers in M-form organizations may also have to compete for external capital funding, making their implementation responsibilities more complex and challenging than those of senior executives in U-form organizations.

Question 6

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 ________.

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. This is because it is cheaper to use services from shared activities as compared to the other alternatives.

Question 7

________ is an economic measure of divisional performance.

Accepted Answer

Economic value added (EVA) is an economic measure of divisional performance that calculates the excess of profits earned by a division over its cost of capital. It takes into account the division's total capital cost, including equity and debt, and serves as an indicator of the value a division has added to the company. Return on assets and a division's growth rate are not comprehensive measures of economic performance, and return on sales only focuses on profitability without considering the cost of capital.

Question 8

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.
-Grace McKenna is best described as a(n) ________ in SpandoCorp.

Accepted Answer

Grace McKenna is responsible for deciding the strategic direction of the company and ensuring that the businesses operate in alignment with this strategy, which are roles typically associated with a senior executive.

Question 9

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.

Accepted Answer

In a multidivisional company, when one division sells its products or services to another division, the price at which the transaction takes place is called a transfer price. This transfer price is typically set by corporate management to achieve corporate objectives, such as maximizing overall profits or incentivizing certain divisions to achieve specific goals. The other options (A, B, and C) are not commonly used terms for this concept.

Question 10

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

Accepted Answer

In an M-form organization, the management of day-to-day operations is delegated to the divisional general managers and functional managers who report to division general managers. This is because M-form organizations are structured as a hierarchy of semi-autonomous, self-contained business units, each with their own distinct functions and goals. The divisional general managers are responsible for overseeing the operations of these business units, while the functional managers oversee specific functional areas such as finance or marketing. The corporate staff managers provide support and guidance to these managers, but do not directly manage day-to-day operations.

Question 11

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

Accepted Answer

The use of a hurdle rate as a single standard for evaluating the performance of a division ignores important differences that may exist across divisions. This may not provide an accurate measure of the division's performance as the hurdle rate may not capture the unique circumstances and challenges faced by each division.

Question 12

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

Accepted Answer

Selling a business unit to the public refers to an initial public offering (IPO), where shares of the unit are offered for purchase by the general public. A corporate spin-off involves creating a new separate company for the business unit, and selling shares of that company to the public; it is not the same as selling the unit directly to the public. Liquidation refers to selling off assets of a company to pay off debts, and a harvest strategy involves maximizing short-term cash flow from a business unit before selling it off.

Question 13

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.

Accepted Answer

The scenario described in the question is characteristic of a corporate spin-off, where a large diversified firm sells one of its business units, and that unit then operates as an independent business. Harvest refers to the process of maximizing profits in a mature business, liquidation refers to the process of winding down a business and selling off its assets, and an initial public offering refers to the first time a company's shares are available for public trading.

Question 14

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

Accepted Answer

Most accounting measures of divisional performance are based on short-term financial results, such as profit margins or return on investment. This myopic view may limit a company's ability to achieve long-term goals or invest in future growth opportunities.

Question 15

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

Accepted Answer

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

Question 16

Transfer pricing should equal

Accepted Answer

Transfer pricing should equal the opportunity cost of the selling division, which is the benefit given up by not selling to an outside customer. This ensures that both divisions are operating at efficient levels and that the overall profitability of the company is maximized.

Question 17

Which of the following statements regarding CEO compensation is accurate?

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 stock and stock options provide incentives for CEOs to perform well and increase the value of the company's stock, which will ultimately result in higher compensation for the CEO.

Question 18

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.
-Which organizational structure is SpandoCorp using?

Accepted Answer

SpandoCorp is using a multidivisional (M-form) organizational structure, where each of the businesses it operates is treated as a separate division and managed as a profit-and-loss center. The roles of Grace McKenna, Wells Tucker, and Kelly Rae also suggest that they are part of the top-level corporate hierarchy responsible for overall strategy, information gathering, and evaluation of decision making.

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

Accepted Answer

EVA (Economic Value Added) is calculated as: EVA = NOPAT - (Capital Employed * WACC). Here, NOPAT is $10 million, Capital Employed is $50 million, and WACC is 10%. So, EVA = $10 million - ($50 million * 10%) = $10 million - $5 million = $5 million.

Question 20

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?

Accepted Answer

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

Quiz 8: Organizing to Implement Corporate Diversification