Objective 23.5
1) Inflation clouds the real economic returns on an asset and ________.
A) makes variable-cost-based ROI higher
B) makes historical-cost-based ROI lower.
C) makes historical-cost-based ROI higher
D) makes variable-cost-based ROI lower
2) Which of the following statements is true?
A) The economic, legal, political, social, and cultural environments differ across countries.
B) The import quotas and tariffs remain the same across all countries according to the standards set by
United Nations.
C) The advances in telecommunications and transportation, the availability of materials and skilled labor
does not differ significantly across countries.
D) The fixed rate policy is followed across all countries to avoid price fluctuations and inflation.
3) ________ would be an uncontrollable factor that a firm would need to consider when evaluating the
return on investment of an international division.
A) Manager’s experience
B) Manager’s compensation
C) Pricing decisions
D) Custom duties
4) In performance evaluations ________.
A) managers should use the swap exchange rate prevailing at the end of a financial period
B) managers should use the average exchange rate prevailing at the end of a financial period
C) managers should use the exchange rate prevailing on the date the assets were acquired
D) managers should use the exchange rate prevailing at the end of a financial period
5) Ventaz Corp. purchased assets for its overseas branch for $10,000. The rate of conversion at the time of
purchase of asset was $1.306 / Euro. What is the value of assets after two years if the rate is $1.508 / Euro
and the average rate being $1.407 / Euro?
A) 7,657 Euros
B) 5,080 Euros
C) 4,070 Euros
D) 3,780 Euros
6) Megatron Corp. earned net income of 13,000 Euros in its overseas branch at France. Its headquarters is
located in the U.S. The rate of conversion during set up was $1.306 / Euro. What is the value of its income
in its home currency if the rate is $1.508 / Euro at the end of a financial year and the average rate being
$1.407 / Euro?
A) $16,060
B) $18,291
C) $14,070
D) $19,768
7) Inflation and fluctuations in foreign-currency exchange rates affect performance measurement.
8) Higher inflation will lead to higher prices for goods or services, which will increase a company’s
operating income and lead to a higher ROI.
9) To convert the operating income for an overseas branch into US dollars, the historical rate of exchange
is used for its conversion into US dollars.
10) To calculate the value of fixed assets for an overseas branch, the historical rate of exchange is used for
its conversion.
11) Discuss the issues and complications that may arise when multinational corporations conduct
performance measurement and comparisons among divisions located in different countries.
Objective 23.6
1) Which of the following is true of rewarding managers on the basis of residual income?
A) Managers are paid a fixed amount for his services regardless of the risk involved.
B) Managers’ efforts are easily measured.
C) Managers taking less risk should be rewarded more since more risk can lead to huge losses.
D) Managers’ rewards are dependent on their own efforts and other local economic factors.
2) ________ describes a situation in which an employee prefers to exert less effort than the effort the
owner desires because the employee’s effort cannot be accurately monitored and enforced.
A) Goal congruence
B) Moral hazard
C) Performance report
D) Incentive report
3) Sensitive performance measures ________.
A) the salary component of the managers
B) are not affected by managers’ performance and fail to induce them to improve
C) motivate managers as well as limit their exposure to risk
D) increases the exposure of credit
4) Which of the following is true of performance measurement?
A) Preferred performance measures do not change much with changes in factors that are beyond
manager’s control.
B) Sensitive performance measures increases the cost of providing incentives.
C) Less-sensitive performance measures induce managers to improve.
D) Managers’ performances should be evaluated based on the financial measures such as residual income
and economic value added.
5) Relative performance evaluation ________.
A) determines the effective intensity of incentives placed on each measure of performance
B) filters out the effect of common uncontrollable factors
C) results in managers helping each other who run similar operations
D) leads to goal congruence
6) Team incentives encourage cooperation by ________.
A) identifying an efficient and a nonefficient employee
B) enhancing the incentives of individual employees leading to overall positive performance
C) letting individuals help one another as they strive toward a common goal
D) rewarding all teams by the same margin
7) Many manufacturing, marketing, and design problems require employees with multiple skills;
therefore, teams are used and the members have the added encouragement of ________.
A) individual incentives
B) management incentives
C) morale incentives
D) team incentives
8) Which of the following is true of an executive compensation plan?
A) The compensation paid to the executives should be linked only to the financial performance of the
company.
B) The executive compensations should be reported to credit rating agencies.
C) It does not help balancing risk with short-run and long-run incentives.
D) It includes benefits such as medical benefits, pension plans, and life insurance.
9) Which of the following is true of benchmarking two managers against each other if they carry out
similar operations?
A) It would lead to better cooperation among the managers.
B) It would reduce the managers’ incentives to help one another.
C) It would enhance the accomplishment of organization goals.
D) It would help reduce costs common to both the departments.
10) An important consideration in designing compensation arrangements is the tradeoff between creating
incentives and imposing risks.
11) The SEC requires companies to disclose the performance criteria-such as a firm’s profitability, revenue
growth, and market share-used to reward executives.
12) One criticism of team-based compensation is that it diminishes the incentives of individual
employees, which can harm a firm’s overall performance.
13) The more owners have access to sensitive performance measures, the more they can rely on incentive
compensation for their managers.
14) The credit rating agencies require detailed disclosures of the compensation arrangements of top-level
executives.
15) The salary component of compensation dominates when performance measures that are sensitive to
managers’ actions are not available.
16) An additional criticism of team-based compensation is that there can be problems managing team
members who are not productive contributors to a team’s success but who, nevertheless, share in the
team’s rewards.
17) Stock options give executives the right to buy company stock at a specified price, called the exercise
price, within a specified period.
18) Craylon Corp. is planning the 2015 operating budget. Average operating assets of $1,800,000 will be
used during the year and unit selling prices are expected to average $100 each. Variable costs of the
division are budgeted at $500,000, while fixed costs are set at $300,000. The company’s required rate of
return is 18%.
Required:
a. Compute the sales volume necessary to achieve a 20% ROI.
b. The division manager receives a bonus of 50% of residual income. What is his anticipated bonus for
2015, assuming he achieves the 20% ROI from part (a)?
19) LaserLife Printer Cartridge Company is a decentralized organization with several autonomous
divisions. The division managers are evaluated, in part, on the basis of the change in their return on
invested assets. Operating results for the Packer Division for 2015 are budgeted as follows:
Sales
$5,000,000
Less variable costs
2,500,000
Contribution margin
2,500,000
Less fixed expenses
1,800,000
Net operating income
$ 700,000
Operating assets for the division are currently $3,600,000. For 2015, the division can add a new product
line for an investment of $600,000. The new product line will generate sales of $1,600,000 and will incur
fixed expenses of $600,000 annually. Variable costs of the new product will average 60% of the selling
price.
Required:
a. What is the effect on ROI of accepting the new product line?
b. If the company’s required rate of return is 6% and residual income is used to evaluate managers,
would this encourage the division to accept the new product line? Explain and show computations.
Sales
Variable costs
Fixed costs
1,560,000
Operating income
Minimum return
Required amount
Income
Required amount
Residual income
44
20) Capital Investments has three divisions. Each division‘s required rate of return is 15%. Planned
operating results for 2015 are as follows:
Division
Operating income
Investment
A
$15,000,000
$100,000,000
B
$25,000,000
$125,000,000
C
$11,000,000
$ 50,000,000
The company is planning an expansion, which will require each division to increase its investments by
$25,000,000 and its income by $4,500,000.
Required:
a. Compute the current ROI for each division.
b. Compute the current residual income for each division.
c. Rank the divisions according to their current ROIs and residual incomes.
d. Determine the effects after adding the new project to each division’s ROI and residual income.
e. Assuming the managers are evaluated on either ROI or residual income, which divisions are pleased
with the expansion and which ones are unhappy?
21) Vega Corp’s corporate income has declined to unacceptable levels. To change the direction of the
company, the board of directors hired a new chief executive officer. She is currently considering three
alternative ways to reward division managers for performance. They are:
1. Give each manager a competitive salary with no bonus for performance.
2. Give each manager a base salary with the largest portion being a bonus based on performance, ROI
being the yardstick.
3. Give each manager a base salary with a bonus based on comparative performance with the other
divisions.
Required:
Evaluate each of the ideas, giving strengths and weaknesses.
22) Executive compensation plans are based on both financial and nonfinancial performance measures.
Discuss
Objective 23.7
1) Which of the following is a difference between a diagnostic control system and an interactive control
system?
A) A diagnostic control system focuses on meeting expectations, while an interactive control system
focuses on standards of ethical behavior.
B) A diagnostic control system focuses on standards of ethical behavior while an interactive control
system focus on meeting expectations.
C) A diagnostic control system focuses on meeting expectations, while an interactive control system
focuses on organizational attention and learning on key strategic issues.
D) A diagnostic control system focuses on organizational attention and learning on key strategic issues,
while an interactive control system focuses on meeting expectations.
2) Boundary systems ________.
A) describe standards of behavior and codes of conduct expected of all employees
B) articulate the mission, purpose, and core values of a company
C) are formal information systems managers use to focus the company’s attention and learning on key
strategic issues
D) describe the geographic limits of a company and help organize its layout
3) Interactive control systems ________.
A) articulate the mission, purpose, and core values of a company
B) describe standards of behavior and codes of conduct expected of all employees and help in achieving
the maximum benefit
C) are formal information systems managers use to focus the company’s attention and learning on key
strategic issues
D) describe the geographic limits of a company and help organize its layout
4) Belief system ________.
A) describe standards of behavior and codes of conduct expected of all executives and board of directors
B) articulate the mission, purpose, and core values of a company
C) are formal information systems managers use to focus the company’s attention and learning on key
strategic issues
D) describe standards of behavior and codes of conduct expected of all employees
5) Interactive control system ________.
A) ensure to adhere to legal or ethical accounting policies and procedures
B) ensure prompt and severe reprimand of unethical conduct, regardless of the benefits that might accrue
to the company from unethical action
C) ensure employees’ intrinsic motivation, the desire to achieve self-satisfaction for performing well
regardless of external rewards such as bonuses or promotion
D) ensure frequent face-to-face communications among managers and employees regarding the critical
uncertainties
6) Managers use ________ to ensure employees’ intrinsic motivation, the desire to achieve self-satisfaction
for performing well regardless of external rewards such as bonuses or promotion.
A) diagnostic control systems
B) boundary systems
C) belief systems
D) interactive control systems
7) “Levers of control,” in addition to a diagnostic control system, are needed in an organization because
________.
A) diagnostic controls have been found to lead to poor financial performance
B) diagnostic controls have no place in a balanced scorecard system
C) pressure to perform on diagnostic controls may lead to unethical behavior
D) they are mandated by the Financial Accounting Standards Board
8) “Cooking the books” means reporting of understated assets and overstated liabilities.
9) Intrinsic motivation comes from being given greater responsibility, doing interesting and creative
work, and having pride in doing that work.
10) An excessive focus on diagnostic control systems and critical performance variables can cause an
organization to ignore emerging threats and opportunities.
11) Some companies, make environmental performance a line item on every employee’s salary appraisal
report.
12) Interactive control systems are informal information systems managers use to focus the company’s
attention and learning on key strategic issues.
13) Measures which monitor critical performance variables that help managers track progress toward
achieving a company’s strategic goals are collectively called diagnostic control systems.
14) Briefly explain each of the four levels of control. Why does a company need to implement more than a
diagnostic control system?