Question 1

Goal congruence can be defined as
A) an incentive plan arranged so the managers' goals are aligned with the shareholders' goals.
B) managers operating the business in the best interest of the shareholders.
C) tying management rewards to shareholder results.
D) all of these are correct.

Accepted Answer

Goal congruence is achieved when the goals of managers are aligned with the goals of shareholders, and this can be achieved through incentive plans and by tying management rewards to shareholder results. Thus, all of the given options are correct.

Question 2

Cornwall Company has two divisions, A and B. Information for each division is as follows:  What is the residual income for A?
A) $25,000
B) $28,000
C) $15,000
D) $40,000

Accepted Answer

The answer of Cornwall Company has two divisions, A and...

Question 3

Multiple measures of performance are beneficial if they
A) are all financial measures.
B) include nonfinancial operating measures.
C) focus only on short-run factors.
D) all of these statements are true.

Accepted Answer

Including nonfinancial operating measures in multiple measures of performance provides a more comprehensive view of how the organization is doing, beyond just financial factors. Focusing only on short-run factors can lead to sacrificing long-term goals for short-term gains, which can be detrimental to the organization in the long run. Including a variety of measures, both financial and nonfinancial, can provide a more balanced view of the organization's performance.

Question 4

Which of the following managerial rewards is NOT a short-term reward?
A) stock ownership
B) cash bonuses
C) stock options
D) both a and b

Accepted Answer

Stock ownership is typically considered a long-term reward, as it offers the potential for gains over a period of years as opposed to an immediate boost in income or compensation.

Question 5

Which of the following is an economic factor affecting performance evaluation in a multinational firm?
A) currency restrictions
B) economic stability
C) impact of foreign policy
D) both a and b

Accepted Answer

Currency restrictions and economic stability are both economic factors that can affect performance evaluation in a multinational firm. Currency restrictions limit the ability of the firm to transfer funds across borders, which can impact its financial performance. Economic stability in a country can also impact a firm's performance, as it affects factors such as consumer demand and market conditions. Therefore, both options A and B are correct. Option C is not an economic factor, but rather a political factor that can also impact a multinational firm.

Question 6

The right to buy a certain number of shares of a company's stock at a particular price is(are) called:
A) Perquisites
B) Cash compensation
C) Stock-based compensation
D) Stock options

Accepted Answer

Stock options are the right to buy a certain number of shares of a company's stock at a particular price, usually with a set expiration date. They are a form of stock-based compensation often used as an incentive for employees or executives. Perquisites (A) are fringe benefits, such as company cars or expense accounts. Cash compensation (B) refers to any payment made to an employee in the form of cash, such as a salary or bonus. Stock-based compensation (C) is a broader term that includes stock options, as well as other types of equity awards like restricted stock units or performance shares.

Question 7

Economic value added is calculated by which of the following formulas?
A) EVA = After-tax operating income + (Weighted average cost of capital ´ Total capital employed)
B) EVA = After-tax operating income * Weighted average cost of capital
C) EVA = After-tax operating income - (Weighted average cost of capital ´ Total capital employed)
D) EVA = Total capital employed - (Weighted average cost of capital ´ After-tax operating income)

Accepted Answer

Economic value added (EVA) is calculated by subtracting the cost of capital from the after-tax operating income. Therefore, the correct formula is EVA = After-tax operating income - (Weighted average cost of capital x Total capital employed). This means that option C is the correct answer.

Question 8

Cornwall Company has two divisions, A and B. Information for each division is as follows:  What is EVA for Division A?
A) $40,000
B) $28,000
C) $15,000
D) $25,000

Accepted Answer

EVA = NOPAT – (Total Capital * WACC)

For Division A:
- NOPAT = $80,000
- Total Capital = $500,000 + $600,000 = $1,100,000
- WACC = (10% * $500,000 / $1,100,000) + (12% * $600,000 / $1,100,000) = 0.0455 + 0.0655 = 0.111

EVA for Division A = $80,000 – ($1,100,000 * 0.111) = $28,000

Therefore, the best choice is B, with an EVA of $28,000.

Question 9

Transfer prices are the prices charged
A) for distributing goods from one warehouse to another.
B) for the goods produced by one division to another division that needs these goods.
C) when delivering goods to the customer.
D) when transferring goods to international divisions.

Accepted Answer

Transfer prices are the prices charged for the goods produced by one division to another division that needs these goods. It is an internal pricing system used by companies to determine the cost of goods or services when transferred between different divisions or subsidiaries.

Question 10

EVA encourages the right kind of behavior from divisions because of its emphasis on
A) after-tax net income.
B) total capital employed.
C) true cost of capital.
D) before-tax operating income.

Accepted Answer

EVA (Economic Value Added) emphasizes on the true cost of capital, which takes into account the opportunity cost of capital invested in the business. Divisions that generate positive EVA are creating value for the firm and are encouraged to continue their behavior. Therefore, EVA encourages the right kind of behavior from divisions.

Question 11

Which of the following would be a reason why managers would NOT provide good service?
A) They may have low ability.
B) They may not prefer to work hard.
C) They may prefer to spend company resources on perquisites.
D) All of these are reasons.

Accepted Answer

All of these are potential reasons why managers may not provide good service. Low ability, lack of motivation or work ethic, and prioritizing personal benefits over serving customers are all factors that can lead to poor service.

Question 12

Which of the following is a political or legal factor affecting performance evaluation in a multinational firm?
A) social attitude toward industry and business
B) literacy rate
C) effect of defense policy
D) currency restrictions

Accepted Answer

The effect of defense policy is a political factor that can affect performance evaluation in a multinational firm. Changes in defense policy can lead to changes in government spending and regulations, which can impact the profitability and operations of firms involved in defense-related industries.

Question 13

A type of fringe benefit received over and above salary is(are) called:
A) Bonus based on net income
B) Cash compensation
C) Perquisites
D) EVA

Accepted Answer

Perquisites, also known as "perks," are non-wage benefits or privileges given to employees as part of their total compensation package. Examples of perks might include company cars, memberships to clubs or gyms, or reimbursement for education expenses. Bonuses based on net income (A) are an additional payment made to employees based on the company's profitability. Cash compensation (B) refers to the actual salary or wages paid to an employee in the form of cash. EVA (D) stands for Economic Value Added, which is a calculated measure of a company's financial performance. It is not a type of fringe benefit.

Question 14

It is important to separate the evaluation of the manager from the evaluation of the division in a multinational firm. A manager's evaluation should NOT include
A) revenues.
B) income taxes.
C) operating costs.
D) cost of goods sold.

Accepted Answer

Income taxes are typically determined at the corporate level and are not directly influenced by the manager's decisions or performance. Therefore, it would not be appropriate to include income taxes in the evaluation of a manager within a multinational firm.

Question 15

Comparison of an international division's ROI can potentially be misleading because of
A) the absence of activity-based management.
B) differing production technologies.
C) the lack of good information.
D) differing environmental factors.

Accepted Answer

The answer of Comparison of an international division's ROI can...

Question 16

Division 'A' produces a component and wants to sell it to Division 'B'. The transfer price is
A) revenue to Division 'A' and a cost to Division 'B'
B) revenue to Division 'B' and a cost to Division 'A'
C) revenue to Division 'A' and no effect on Division 'B'
D) a cost to Division 'B' and no effect on Division 'A'

Accepted Answer

The transfer price is considered revenue for the selling division (Division A) because it represents the income received from selling the component. For the buying division (Division B), this transfer price is a cost because it represents the expense incurred to acquire the component.

Question 17

Cornwall Company has two divisions, A and B. Information for each division is as follows:  What is the operating asset turnover for A?
A) 0.15
B) 0.10
C) 4.00
D) 2.50

Accepted Answer

The answer of Cornwall Company has two divisions, A and...

Question 18

The transfer price that would leave the selling division no worse off if the good is sold to an internal division is(are) called:
A) The maximum transfer price
B) The negotiated transfer price
C) The minimum transfer price
D) Both a and c

Accepted Answer

The minimum transfer price is the price that would leave the selling division no worse off if the good is sold internally, as it covers at least the variable costs of producing the goods. The maximum transfer price is the highest price that the buying division is willing to pay, while the negotiated transfer price is a price that both the buying and selling divisions agree upon through negotiations.

Question 19

Which of the following is NOT an environmental factor affecting performance evaluation in the multinational firm?
A) sociological factors
B) economic factors
C) political or legal factors
D) All of these are environmental factors affecting performance evaluation in the multinational firm.

Accepted Answer

All of the options listed (sociological, economic, and political or legal factors) are environmental factors that can impact performance evaluation in a multinational firm.

Question 20

Cornwall Company has two divisions, A and B. Information for each division is as follows:  What is EVA for Division B?
A) $144,000
B) $216,000
C) $116,000
D) $44,000

Accepted Answer

The answer of Cornwall Company has two divisions, A and...

Quiz 10: Decentralization: Responsibility Accounting, Performance Evaluation, and Transfer Pricing

Goal congruence can be defined as

Cornwall Company has two divisions, A and B. Information for each division is as follows: What is the residual income for A?

Multiple measures of performance are beneficial if they

Which of the following managerial rewards is NOT a short-term reward?

Which of the following is an economic factor affecting performance evaluation in a multinational firm?

The right to buy a certain number of shares of a company's stock at a particular price is(are) called:

Economic value added is calculated by which of the following formulas?

Cornwall Company has two divisions, A and B. Information for each division is as follows: What is EVA for Division A?

Transfer prices are the prices charged

EVA encourages the right kind of behavior from divisions because of its emphasis on

Which of the following would be a reason why managers would NOT provide good service?

Which of the following is a political or legal factor affecting performance evaluation in a multinational firm?

A type of fringe benefit received over and above salary is(are) called:

It is important to separate the evaluation of the manager from the evaluation of the division in a multinational firm. A manager's evaluation should NOT include

Comparison of an international division's ROI can potentially be misleading because of

Division 'A' produces a component and wants to sell it to Division 'B'. The transfer price is

Cornwall Company has two divisions, A and B. Information for each division is as follows: What is the operating asset turnover for A?

The transfer price that would leave the selling division no worse off if the good is sold to an internal division is(are) called:

Which of the following is NOT an environmental factor affecting performance evaluation in the multinational firm?

Cornwall Company has two divisions, A and B. Information for each division is as follows: What is EVA for Division B?