Managerial Econmics Brickley, Smith, Zimmerman Chapter 17 Answers

Managerial Economics and Organizational Architecture

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Chapter 17 - Divisional Performance Evaluation CHAPTER 17 DIVISIONAL PERFORMANCE EVALUATION CHAPTER SUMMARY This chapter is the second of two chapters on performance evaluation. It focuses on the measurement of divisional performance. It begins by discussing the various ways firms measure subunit performance. It provides a detailed analysis of transfer pricing and discusses issues relating to the use of the internal accounting system in performance evaluation. CHAPTER OUTLINE M EASURING D IVISIONAL P ERFORMANCE Cost Centers Expense Centers Managerial Application: Eliminating an Expense Center Revenue Centers Profit Centers Investment Centers Accounting ROA Accounting Residual Income Managerial Application: EVA Often Is Linked to a Change in the Compensation Plan T RANSFER PRICING Managerial Application: Transfer Pricing and Taxes Economics of Transfer Pricing Transfer Pricing with Costless Information Managerial Application: Dual Transfer Pricing System? Transfer Pricing with Asymmetric Information Common Transfer-Pricing Methods Market-Based Transfer Prices Marginal-Cost Transfer Prices Full-Cost Transfer Prices Negotiated Transfer Prices Reorganization: The Solution If All Else Fails I NTERNAL A CCOUNTING S YSTEM AND P ERFORMANCE E VALUATION Uses of the Accounting System Managerial Application: Internal Auditing in Law Firms Trade-offs between Decision Management and Decision Control Managerial Application: Massive Financial Fraud at Cendant 17-1
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Chapter 17 - Divisional Performance Evaluation S UMMARY TEACHING THE CHAPTER This chapter continues to focus on the third leg of the stool, performance evaluation. Whereas the previous chapter focused on individual evaluation, this chapter’s focus is on evaluation of divisions within the firm. The quantitative analysis of transfer prices builds on the costs of production analysis, introduced in chapter 5, and the profit-maximization analysis, introduced in chapters 5 and 6. The chapter opens with a discussion of the different unit types within the firm (cost centers, expense centers, revenue centers, profit centers, and investment centers); this material is summarized in Table 17.2. The most challenging part of the chapter is the middle section on transfer pricing. Instructors should make use of the two Managerial Applications that highlight this topic and the thorough presentation of the quantitative analysis used to determine transfer prices. The section of the chapter on “Common Transfer-Pricing Methods” lacks Managerial Applications so instructors may want to find examples to supplement this material. The final section of the chapter focuses on the use of internal accounting systems in evaluation. There are two Managerial Applications that can be used to generate class discussion about this topic. Instructors will likely want to assign or review in class the
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Managerial Econmics Brickley, Smith, Zimmerman Chapter 17 Answers

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