Each partner in a simple profit-sharing contract that splits the independently verifiable sales revenue minus unobservable cost has an incentive
A)to reject an automatic renewal of the contract
B)to understate fixed cost
C)to overstate avoidable cost
D)to understate customer loyalty for repeat purchases
E)to renew the partnership contract

Question

Quizplus · Accepted Answer

Each partner has an incentive to overstate avoidable costs to reduce the apparent profit, thereby decreasing the amount they owe to the other partner based on the profit-sharing agreement.

Each Partner in a Simple Profit-Sharing Contract That Splits the Independently