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 wanted to measure the performance of its divisions with a method that would minimize any potential short-term bias, it should use a(n)
A) hurdle rate based measure of divisional performance.
B) divisional budget based measure of performance.
C) economic value added measure of divisional performance.
D) measure of performance based on the average level of profitability of firms in a division's industry.

Question

Quizplus · Accepted Answer

The economic value added measure of divisional performance would be the best choice to minimize any potential short-term bias. This measure focuses on the long-term profitability of a division by deducting the cost of capital from operating profits, which encourages managers to make decisions that increase the value of the division over time. In contrast, the other options (hurdle rate based measure, divisional budget based measure, and measure of performance based on industry profitability) could incentivize managers to focus on short-term results, which may not be in the best interest of the company overall.

SpandoCorp Is a Diversified Firm That Makes Industrial, Military and Consumer