Explain how return on investment (ROI) is calculated and how it can be decomposed into two financial measures.
Explain how and why the use of ROI for performance evaluation can cause managers to make decisions that could be
harmful to an organization in the long run.
Explain how residual income is calculated, and define required rate of return in your own words.
Explain why the use of residual income for performance evaluation provides better incentives, in some ways, than ROI,
but still causes managers to make some decisions that could be harmful to an organization in the long run.
Explain the differences between general and specific knowledge. Give an example of an industry where knowledge is
quite general and an example of an industry that requires specific knowledge.
Explain why organizational form may vary if specific knowledge versus general knowledge is needed for decision making.
Describe agency costs and give several examples of them.
Explain how EVA differs from residual income.
Identify the four different types of responsibility centers and explain the general objectives of each.
An organization’s plant in Tennessee manufactures a product that is shipped to a branch in Oregon for sale. Does it make
any difference which branch (each is a profit center) is charged for the cost of transportation? Explain.
A national corporation, Fast Print, decided to expand into several developing countries. The corporation has been
managed under a centralized organizational form, but is considering changing to a decentralized form. List the
advantages and disadvantages of making this change.
Suppose transfer prices are set at market prices and a manager who previously purchased internally begins to purchase
externally. Explain what it means to say that the outsourcing decision might have been suboptimal.
Describe as many different methods for setting transfer prices as you can.
Describe the restrictions that are often imposed on transfer prices by income tax regulations.
