Question

Question 1: The new CEO of a company decides to measure performance based on earnings growth and give every office manager in the company (300 of them) a bonus of 20% if earnings growth exceeds 10% and no bonus otherwise. Why might this be a poor incentive system? Select one:

a. It will cost the company too much money.

b. It fails to hold people responsible for things they control that matter to the company.

c. It holds each manager responsible for many things he/she cannot control.

d. It is illegal to provide managers with profit-based bonuses.

e. It ensures that responsibility and control are matched.

Question 2: Which of the following is the reason that ROI is not always a good performance evaluation measure for a responsibility center? Select one:

a. Some responsibility centers do not have control of their investment activities.

b. Some responsibility centers have ROIs that are much higher than the firm's cost of capital.

c. Some responsibility centers have managers planning to change jobs in the near future.

d. Some responsibility centers have accounting systems that are vulnerable to manipulation.

e. All of the above

f. None of the above

Question 3:

Which of the following is not a plausible choice for a transfer price?

Select one: a. Market price

b. Variable cost

c. Full cost

d. Differential cost

e. Sunk cost

Answer 1

Question 1

Answer (c)

c. It holds each manager responsible for many things he/she cannot control.

The reason is an earnings-based bonus system doesn't account for efforts by employees, and employees may miss their opportunity for bonuses due to factors beyond their control. This might make it a poor incentive system

Question 2

Answer (e)

e) All of the above

All the given conditions are reasons for stating that ROI is not always a good performance evaluation measure for a responsibility center.

Question 3

Answer (e)

e) Sunk costs

Sunk costs are not a plausible choice for transfer price. Sunk costs are the costs that are already incurred and cannot be avoided.