Pepperdine University

FINC 655

Chapter 22

Multiple Choice Questions

1)A computer manufacturer has two divisions: one serving residential customers and one serving business customers. If an incentive conflict arises between the two divisions, how will overall company profits be affected?

1. 1. Profits will definitely fall. [while profit often falls due to division conflict, it is not definite]
   2. Profits will definitely rise. [profit is unlikely to increase due to a divisional conflict]
   3. Profits may fall, but it depends on the nature of the conflict. [
   4. The conflict has no potential to affect overall profit. [while the conflict is not guaranteed to affect profit, you should definitely be worried about the potential to affect profit]

2. Which of the following changes might help solve a divisional conflict regarding a decision?
   1. Change who has authority to make the decision [yes, this might help but are there other options?]
   2. Transfer information to the decision makers so they are better informed [yes, this might help but are there other options?]
   3. Change the performance evaluation and associated compensation of the decision makers [yes, this might help but are there other options?]
   4. All of the above [; all of the above are potential solutions to consider]

3. Joe runs the Service Division for a car dealership. The overall dealership has profit of $10 million on sales of $100 million and costs of $90 million. Joe’ s division contributed $9 million in sales and $7 million in costs. If the Service Division is evaluated as a profit center, what dollar amount is most relevant to Joe?
   1. $2 million [; this is the profit of the Service Division]
   2. $7 million [while the $7 million in cost is important, other figures matter too]
   3. $9 million [while the $9 million in sales is important, other figures matter too]
   4. $10 million [because Joe’s incentives are tied to Service Division profit, he is unlikely to consider overall dealership profit as most relevant]

4. If you were a manager of a cost center, which of the following areas would be of most interest to you?
   1. Capturing potential economies of scale. [

1. 2. Increasing the quality of your product. [cost centers are normally rewarded for producing at the lowest cost; increasing quality would likely increase cost rather than reduce it]
   3. Hiring more marketing staff to figure out how to increase prices. [cost centers are normally rewarded for producing at the lowest cost; adding marketing staff would likely increase cost rather than reduce it]
   4. Adding additional features to your product. [cost centers are normally rewarded for producing at the lowest cost; adding features would likely increase cost rather than reduce it]

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5. Transfer prices should be set at
   1. marginal cost of the selling division plus a reasonable profit amount. [this could lead to a double mark-up problem]
   2. marginal cost of the selling division unless it is evaluated as a profit center. [whether the division is evaluated as a profit center should not impact the transfer price]
   3. the opportunity cost of the asset being transferred. [
   4. at whatever price is negotiated between the selling and buying divisions. [this may or may not result in the right price being negotiated]

6. Which of the following provides an example of divisions based on a functional organizational structure?
   1. Americas, Africa, Asia, Europe [this would be an example of an M-form based on region]
   2. Research and development, production, finance, marketing [
   3. Youth products, teen products, senior products [this would be an example of an M-form based on product]
   4. Business users, home users, educational users [this would be an example of an M-form based on customer type]

7. Which type of organizational form has the benefit of closer coordination to serve a particular product or geographic area?
   1. Profit centers. [a profit center means that the group or division is evaluated based on profit; this is not directly related to coordination to serve a product group or geographic area]
   2. Functional organizations. [a lack of coordination is one of the challenges not benefits of a functional structure]
   3. M-form organizations. [
   4. Functional and M-form organizations have the same benefits. [these two structures have different types of benefits]

8. Which of the following organizational forms requires the strongest management oversight to ensure coordination of functions?
   1. Profit centers. [treating a division as a profit center refers to how it is evaluated not to the company’s organizational form]
   2. Functional organizations. [
   3. M-form organizations. [one of the benefits of the M-form is the higher level of coordination of functional areas, so it is not as likely to need strong management oversight]
   4. Functional and M-form organizations likely require similar oversight. [the two forms differ in the amount of oversight needed to foster coordination]

9. Which of the following actions is consistent with a manager whose compensation depends on meeting a budget goal and who does not believe he can make that goal?
   1. Asking a vendor to pre-ship and invoice materials for the following year. [yes, this action is consistent but are there other actions?]
   2. Discovering a “problem” in the order taking process, thereby forcibly pushing sales into the ensuing year. [yes, this action is consistent but are there other actions?]

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