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?
a. Profits will definitely fall. [while profit often falls due to division conflict, it is not
definite]
b. Profits will definitely rise. [profit is unlikely to increase due to a divisional conflict]
c. Profits may fall, but it depends on the nature of the conflict. [correct]
d. 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?
a. Change who has authority to make the decision [yes, this might help but are there
other options?]
b. Transfer information to the decision makers so they are better informed [yes, this
might help but are there other options?]
c. Change the performance evaluation and associated compensation of the decision
makers [yes, this might help but are there other options?]
d. All of the above [correct; 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?
a. $2 million [correct; this is the profit of the Service Division]
b. $7 million [while the $7 million in cost is important, other figures matter too]
c. $9 million [while the $9 million in sales is important, other figures matter too]
d. $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?
a. Capturing potential economies of scale. [correct]
b. 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]
c. 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]
d. 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]

1
5. Transfer prices should be set at
a. marginal cost of the selling division plus a reasonable profit amount. [this could lead
to a double mark-up problem]
b. 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]
c. the opportunity cost of the asset being transferred. [correct]
d. 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?
a. Americas, Africa, Asia, Europe [this would be an example of an M-form based on
region]
b. Research and development, production, finance, marketing [correct]
c. Youth products, teen products, senior products [this would be an example of an M-
form based on product]
d. 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?
a. 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]
b. Functional organizations. [a lack of coordination is one of the challenges not benefits
of a functional structure]
c. M-form organizations. [correct]
d. 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?
a. Profit centers. [treating a division as a profit center refers to how it is evaluated not
to the company’s organizational form]
b. Functional organizations. [correct]
c. 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]
d. Functional and M-form organizations likely require similar oversight. [the two
forms differ in the amount of oversight needed to foster coordination]

2
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?
a. Asking a vendor to pre-ship and invoice materials for the following year. [yes, this
action is consistent but are there other actions?]
b. 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?]
c. Increasing accounting reserve estimates, leading to higher recognized expenses.
[yes, this action is consistent but are there other actions?]
d. All of the above [correct; all of these actions are consistent with this type of
compensation scheme]

10. One of the basic functions of the budgeting process is

a. assigning decision rights. [assigning decision rights is part of organization design]
b. transferring information. [correct]
c. evaluating managerial performance. [while performance evaluation is sometimes
related to achieving budgets, a basic function of the budgeting process is not to
evaluate performance]
d. implementing structural change. [budgeting and implementing structural change
are separate activities]