MADM MCQs PDF

Session 6: Activity-Based Costing (ABC) 1. Which of the following is a primary benefit of Activity-Based Costing (ABC)? A. Simplifies the allocation of overhead costs by using a single cost driver. B. Enhances the accuracy of product costing by assigning overhead based on multiple...

Session 6: Activity-Based Costing (ABC) 1. Which of the following is a primary benefit of Activity-Based Costing (ABC)? A. Simplifies the allocation of overhead costs by using a single cost driver. B. Enhances the accuracy of product costing by assigning overhead based on multiple activities. C. Reduces the need for detailed cost analysis by focusing on high-level cost pools. D. Eliminates the need for direct cost tracking in manufacturing processes. Correct Answer: B. Enhances the accuracy of product costing by assigning overhead based on multiple activities. 2. In an Activity-Based Costing system, what is a “cost driver”? A. A factor that directly influences the level of activity within a department. B. A type of direct cost associated with a specific product. C. An overhead cost that is directly assigned to a single product. D. A method of allocating fixed costs based on production volume. Correct Answer: A. A factor that directly influences the level of activity within a department. 3. Which of the following would most likely be considered a unit-level activity in ABC? A. Setting up machinery for production. B. Quality inspections. C. Operating machinery to produce individual units. D. Research and development activities. Correct Answer: C. Operating machinery to produce individual units. 4. Which of the following scenarios would indicate that a company might benefit from switching to an Activity-Based Costing system? A. The company produces a single product with uniform resource consumption. B. The company has high overhead costs that are uniformly applied to all products. C. The company’s products consume resources at different rates, but overhead costs are allocated based on direct labor hours. D. The company’s overhead costs are negligible compared to direct costs. Correct Answer: C. The company’s products consume resources at different rates, but overhead costs are allocated based on direct labor hours. Easy: 1. Which of the following best describes Activity-Based Costing (ABC)? A. A method that allocates all overhead costs based on direct labor hours. B. A costing method that assigns overhead costs to products based on the activities they require. C. A technique that focuses only on variable costs in production. D. A system that eliminates the need for cost drivers. Correct Answer: B. A costing method that assigns overhead costs to products based on the activities they require. 2. In ABC, which of the following would be considered a “cost pool”? A. Direct labor cost for a specific product. B. The total overhead cost associated with a specific activity, such as machine setup. C. A list of all materials used in production. D. The selling price of a product. Correct Answer: B. The total overhead cost associated with a specific activity, such as machine setup. 3. Which of the following is an example of a cost driver in an Activity-Based Costing system? A. Number of machine hours used. B. Total direct labor cost. C. Number of products sold. D. Cost of raw materials. Correct Answer: A. Number of machine hours used. 4. What is the primary advantage of using Activity-Based Costing? A. Simplifies cost allocation. B. Provides more accurate product costs by assigning costs based on activities. C. Reduces the need for detailed analysis of overhead costs. D. Eliminates the need for cost drivers. Correct Answer: B. Provides more accurate product costs by assigning costs based on activities. 5. Which of the following would NOT be an appropriate cost driver for allocating machine setup costs in an ABC system? A. Number of setups. B. Direct labor hours. C. Number of units produced. D. Machine hours used. Correct Answer: B. Direct labor hours. Medium: 6. In an Activity-Based Costing system, what is the first step in assigning costs to products? A. Identifying and classifying activities. B. Assigning direct costs to products. C. Calculating total manufacturing costs. D. Determining the sales price of the product. Correct Answer: A. Identifying and classifying activities. 7. Which of the following statements about Activity-Based Costing is true? A. ABC is most beneficial in companies with uniform product lines and processes. B. ABC eliminates the need for cost allocation altogether. C. ABC assigns overhead costs based on the specific activities required by each product. D. ABC is less accurate than traditional costing methods. Correct Answer: C. ABC assigns overhead costs based on the specific activities required by each product. 8. Which of the following scenarios would most likely lead to overcosting of products in a traditional costing system but not in an ABC system? A. A company with very high direct labor costs. B. A company with diverse products that consume overhead resources at different rates. C. A company with minimal overhead costs. D. A company with a single product line. Correct Answer: B. A company with diverse products that consume overhead resources at different rates. 9. Which of the following activities would most likely be classified as a batch-level activity in an Activity-Based Costing system? A. Machine setup for each batch of production. B. Purchasing raw materials.  C. Research and development. D. Customer service after sales. Correct Answer: A. Machine setup for each batch of production. 10. What is a potential drawback of implementing an Activity-Based Costing system? A. It simplifies the cost allocation process. B. It is more expensive and time-consuming to implement than traditional costing systems. C. It only works for large manufacturing companies. D. It reduces the accuracy of product cost information. Correct Answer: B. It is more expensive and time-consuming to implement than traditional costing systems. Hard: 11. Which of the following is likely to occur when using Activity-Based Costing in a company with highly automated processes? A. Overhead costs will be under-allocated to products. B. The use of machine hours as a cost driver will likely lead to more accurate product costing. C. Direct labor will remain the primary cost driver. D. Indirect costs will be ignored in cost allocation. Correct Answer: B. The use of machine hours as a cost driver will likely lead to more accurate product costing. 12. In ABC, how are costs typically assigned to cost pools? A. Based on the direct material used. B. Based on the overall company budget. C. Based on activities that cause the incurrence of the costs. D. Based on historical spending patterns. Correct Answer: C. Based on activities that cause the incurrence of the costs. 13. When comparing traditional costing to Activity-Based Costing, which of the following statements is true? A. Traditional costing is more accurate for complex production processes. B. ABC provides a more detailed analysis of overhead costs and their drivers. C. Traditional costing assigns costs based on a wider range of cost drivers than ABC. D. ABC is generally less costly to implement than traditional costing. Correct Answer: B. ABC provides a more detailed analysis of overhead costs and their drivers. 14. In which of the following situations would Activity-Based Costing likely provide the greatest benefit? A. A company with homogeneous product lines. B. A company where overhead costs are a small portion of total costs. C. A company with diverse products and significant overhead costs. D. A service company with minimal direct costs. Correct Answer: C. A company with diverse products and significant overhead costs. 15. Which of the following is a reason why Activity-Based Costing can lead to better decision-making in pricing and product mix decisions? A. It ignores indirect costs, focusing only on direct costs. B. It allocates overhead costs more accurately based on actual activities, leading to a clearer picture of true product costs.  C. It reduces the number of cost pools, simplifying the cost structure. D. It eliminates the need for tracking individual product costs. Correct Answer: B. It allocates overhead costs more accurately based on actual activities, leading to a clearer picture of true product costs. 16. Which of the following is an example of a facility-level activity in an ABC system? A. Heating and lighting for the entire factory. B. Quality control testing for each product batch. C. Setting up a machine for a specific production run. D. Assembling components for a product. Correct Answer: A. Heating and lighting for the entire factory. 17. How does Activity-Based Costing help in identifying non-value-added activities? A. By focusing exclusively on direct labor and material costs. B. By providing detailed insights into the costs associated with each activity, helping to identify activities that do not contribute to customer value. C. By ignoring indirect costs, making it easier to see non-value-added activities. D. By consolidating all costs into a single cost pool. Correct Answer: B. By providing detailed insights into the costs associated with each activity, helping to identify activities that do not contribute to customer value. 18. When would a company most likely switch from traditional costing to Activity-Based Costing? A. When the company’s products and processes are very simple. B. When the company’s overhead costs are minimal. C. When the company’s overhead costs are complex and driven by multiple activities. D. When the company’s direct labor costs far exceed its overhead costs. Correct Answer: C. When the company’s overhead costs are complex and driven by multiple activities. 19. Which of the following is a limitation of Activity-Based Costing? A. It overemphasizes direct costs at the expense of indirect costs. B. It can be time-consuming and costly to implement and maintain. C. It provides less accurate product cost information than traditional costing methods. D. It eliminates the need for budgeting and variance analysis. Correct Answer: B. It can be time-consuming and costly to implement and maintain. 20. In ABC, what would likely happen to the cost assigned to a product if it consumed more of a high-cost activity than other products? A. The product would be under-costed compared to others. B. The product would be over-costed compared to others. C. The product would be accurately costed, reflecting its higher resource consumption. D. The product cost would not change, as all products share costs equally. Correct Answer: C. The product would be accurately costed, reflecting its higher resource consumption. Session 7: Performance Control (Variance Analysis & Balanced Scorecard) 5. Which of the following is NOT typically included as a perspective in a Balanced Scorecard?  A. Financial B. Customer C. Environmental D. Internal Business Processes Correct Answer: C. Environmental 6. Variance analysis is primarily used in performance control to: A. Determine the overall profitability of the company. B. Identify deviations between actual and budgeted performance and understand their causes. C. Allocate overhead costs more accurately across products. D. Evaluate the market share of the company’s products. Correct Answer: B. Identify deviations between actual and budgeted performance and understand their causes. 7. The Balanced Scorecard approach to performance measurement emphasizes: A. Exclusive focus on financial metrics to drive performance. B. A combination of financial and non-financial measures aligned with strategic goals. C. Benchmarking against competitors’ financial performance. D. Reducing costs by eliminating low-value activities. Correct Answer: B. A combination of financial and non-financial measures aligned with strategic goals. 8. Which variance would be most concerning if a company consistently experiences it as unfavorable over several periods? A. Material Price Variance B. Sales Volume Variance C. Labor Efficiency Variance D. Overhead Spending Variance Correct Answer: C. Labor Efficiency Variance 1. What is the main purpose of variance analysis in performance control? A. To determine the market share of the company. B. To compare actual performance against budgeted performance and identify the causes of any differences. C. To calculate the break-even point for a product. D. To allocate overhead costs to products. Correct Answer: B. To compare actual performance against budgeted performance and identify the causes of any differences. 2. Which of the following is a financial perspective measure in the Balanced Scorecard? A. Customer satisfaction index. B. Return on investment (ROI). C. Employee turnover rate. D. Number of product defects. Correct Answer: B. Return on investment (ROI). 3. In variance analysis, a favorable variance means: A. Actual results were better than expected. B. Actual results were worse than expected. C. The variance had no impact on performance.  D. The variance was due to external factors beyond control. Correct Answer: A. Actual results were better than expected. 4. The Balanced Scorecard includes perspectives that focus on all of the following EXCEPT: A. Financial performance. B. Customer relationships. C. Environmental impact. D. Internal processes. Correct Answer: C. Environmental impact. 5. Which of the following is an example of a non-financial measure in the Balanced Scorecard? A. Net profit margin. B. Customer retention rate. C. Return on equity (ROE). D. Earnings per share (EPS). Correct Answer: B. Customer retention rate. Medium: 6. What is the primary advantage of using a Balanced Scorecard? A. It focuses only on financial measures to ensure profitability. B. It integrates financial and non-financial measures to provide a comprehensive view of performance. C. It eliminates the need for variance analysis. D. It reduces the cost of performance evaluation. Correct Answer: B. It integrates financial and non-financial measures to provide a comprehensive view of performance. 7. Which variance would be the most critical to investigate if a company consistently reports it as unfavorable? A. Material Price Variance. B. Labor Rate Variance. C. Sales Volume Variance. D. Overhead Efficiency Variance. Correct Answer: C. Sales Volume Variance. 8. In a Balanced Scorecard, the “Internal Business Processes” perspective is concerned with: A. The company’s profitability. B. Customer satisfaction and retention. C. The efficiency and effectiveness of the company’s operations. D. The company’s ability to innovate and grow. Correct Answer: C. The efficiency and effectiveness of the company’s operations. 9. Which of the following best describes a “favorable” variance in a cost control context? A. Actual costs are higher than budgeted costs. B. Actual costs are lower than budgeted costs. C. Actual revenue is lower than budgeted revenue. D. Actual sales volume is lower than budgeted sales volume. Correct Answer: B. Actual costs are lower than budgeted costs. 10. Which perspective of the Balanced Scorecard would include metrics like “Cycle Time” and “Defect Rate”?  A. Financial Perspective. B. Customer Perspective. C. Internal Business Processes Perspective. D. Learning and Growth Perspective. Correct Answer: C. Internal Business Processes Perspective. Hard: 11. In the context of the Balanced Scorecard, what is the main purpose of the “Learning and Growth” perspective? A. To measure financial outcomes. B. To track customer satisfaction and loyalty. C. To assess the company’s internal processes and their efficiency. D. To evaluate the organization’s ability to innovate, improve, and learn. Correct Answer: D. To evaluate the organization’s ability to innovate, improve, and learn. 12. Which of the following would NOT typically be considered when analyzing the “Customer” perspective of the Balanced Scorecard? A. Customer acquisition cost. B. Market share growth. C. Employee satisfaction. D. Customer retention rate. Correct Answer: C. Employee satisfaction. 13. When a company consistently reports an unfavorable “Material Quantity Variance,” what could this indicate? A. The company is purchasing materials at higher prices than expected. B. The production process is using more materials than planned. C. Labor costs are higher than budgeted. D. Sales are lower than forecasted. Correct Answer: B. The production process is using more materials than planned. 14. Which of the following best describes the relationship between the perspectives in the Balanced Scorecard? A. The financial perspective is independent and does not affect the other perspectives. B. Improvements in the Learning and Growth perspective can lead to improvements in Internal Processes, which in turn can enhance Customer Satisfaction and ultimately improve Financial outcomes. C. The Customer perspective directly impacts the Learning and Growth perspective without influencing Internal Processes or Financial outcomes. D. The perspectives are not related and should be evaluated separately. Correct Answer: B. Improvements in the Learning and Growth perspective can lead to improvements in Internal Processes, which in turn can enhance Customer Satisfaction and ultimately improve Financial outcomes. 15. In variance analysis, what does an unfavorable “Labor Efficiency Variance” indicate? A. Workers are paid more than the budgeted rate. B. More labor hours were required to complete a job than were budgeted. C. The actual number of units produced was higher than expected. D. The cost of materials was higher than budgeted. Correct Answer: B. More labor hours were required to complete a job than were budgeted. 16. Why is it important to consider non-financial metrics in performance measurement?  A. Non-financial metrics provide immediate feedback on profitability. B. They offer insight into areas such as customer satisfaction, operational efficiency, and employee development, which are critical for long-term success. C. Non-financial metrics are easier to measure and interpret than financial metrics. D. Non-financial metrics replace the need for financial metrics in performance evaluations. Correct Answer: B. They offer insight into areas such as customer satisfaction, operational efficiency, and employee development, which are critical for long-term success. 17. A Balanced Scorecard approach is most beneficial in which of the following scenarios? A. A company that only measures financial outcomes to assess performance. B. A company seeking a balanced view of performance across various dimensions, including financial, customer, internal processes, and learning and growth. C. A company focusing exclusively on short-term profit maximization. D. A company in a stable industry with no need for innovation or customer feedback. Correct Answer: B. A company seeking a balanced view of performance across various dimensions, including financial, customer, internal processes, and learning and growth. 18. Which of the following is a key difference between traditional variance analysis and the Balanced Scorecard? A. Variance analysis focuses solely on financial metrics, while the Balanced Scorecard includes both financial and non-financial metrics. B. Variance analysis does not require any historical data, while the Balanced Scorecard relies entirely on past performance. C. Variance analysis is a strategic tool, while the Balanced Scorecard is purely operational. D. The Balanced Scorecard is used for budgeting purposes, while variance analysis is not. Correct Answer: A. Variance analysis focuses solely on financial metrics, while the Balanced Scorecard includes both financial and non-financial metrics. 19. Which of the following is a potential risk of focusing too heavily on financial metrics in performance evaluation? A. It may lead to underinvestment in areas like customer satisfaction and employee development. B. It eliminates the need for strategic planning. C. It simplifies the performance evaluation process. D. It ensures a balanced approach to decision-making. Correct Answer: A. It may lead to underinvestment in areas like customer satisfaction and employee development. 20. Which of the following would be an example of an internal business process metric in the Balanced Scorecard? A. Return on assets (ROA). B. Employee turnover rate. C. Order fulfillment cycle time. D. Market share growth. Correct Answer: C. Order fulfillment cycle time. Session 8: Transfer Pricing Easy: 1. What is transfer pricing? A. The pricing of goods, services, or intangibles sold between divisions within the same company. B. The process of setting external prices for products sold to customers. C. The method used to determine the value of a company’s stock. D. The calculation of production costs within a single department. Correct Answer: A. The pricing of goods, services, or intangibles sold between divisions within the same company. 2. Which of the following is a common method used to set transfer prices? A. Market-based pricing. B. Activity-based costing. C. Absorption costing. D. Contribution margin analysis. Correct Answer: A. Market-based pricing. 3. What is the primary objective of transfer pricing? A. To reduce the overall tax liability of a company. B. To ensure that divisions within a company operate as independently as possible. C. To establish prices for internal transactions that promote goal congruence across divisions. D. To maximize the profit of the selling division at the expense of the buying division. Correct Answer: C. To establish prices for internal transactions that promote goal congruence across divisions. 4. Which of the following best describes a cost-based transfer price? A. A transfer price that is set based on the market price of the product or service. B. A transfer price that is based on the costs incurred by the selling division, often with a markup. C. A transfer price that is determined through negotiation between the buying and selling divisions. D. A transfer price that is set to equal the variable cost of production. Correct Answer: B. A transfer price that is based on the costs incurred by the selling division, often with a markup. 5. Which of the following scenarios could lead to conflict between divisions regarding transfer pricing? A. The transfer price is set below the market price. B. The transfer price is set above the cost of production but below the market price. C. The transfer price is set to maximize the profit of the selling division at the expense of the buying division. D. The transfer price is set based on the negotiated agreement between both divisions. Correct Answer: C. The transfer price is set to maximize the profit of the selling division at the expense of the buying division. Medium: 6. When would a company most likely use a market-based transfer price? A. When there is an active external market for the product or service being transferred. B. When the company wants to minimize tax liabilities in high-tax jurisdictions.  C. When the product or service is unique and has no comparable external market. D. When the selling division has significant excess capacity. Correct Answer: A. When there is an active external market for the product or service being transferred. 7. Which of the following is a potential disadvantage of using cost-based transfer pricing? A. It can lead to underutilization of the selling division’s capacity. B. It may result in suboptimal decision-making if the cost structure of the selling division is inefficient. C. It typically leads to tax liabilities that are higher than those associated with market-based pricing. D. It encourages divisions to focus solely on their internal transactions without regard to external market conditions. Correct Answer: B. It may result in suboptimal decision-making if the cost structure of the selling division is inefficient. 8. In which situation would a negotiated transfer price be most appropriate? A. When there is a well-established market price for the product being transferred. B. When the divisions involved have significant autonomy and are responsible for their own profitability. C. When the company has strict central control over all pricing decisions. D. When the variable costs of production are difficult to determine. Correct Answer: B. When the divisions involved have significant autonomy and are responsible for their own profitability. 9. Which of the following would be an outcome if a transfer price is set too high for the buying division? A. The buying division may report lower profitability, which could lead to a reduction in its performance incentives. B. The selling division may experience excess demand from the buying division. C. The company as a whole will incur additional external costs. D. The overall tax liability for the company will decrease. Correct Answer: A. The buying division may report lower profitability, which could lead to a reduction in its performance incentives. 10. Which of the following is a common goal in setting transfer prices within a multinational corporation? A. Minimizing the use of external suppliers. B. Maximizing the tax liability of the subsidiary in the highest-tax jurisdiction. C. Complying with international tax regulations while optimizing global profit. D. Ensuring that all transactions are conducted in the local currency of the parent company. Correct Answer: C. Complying with international tax regulations while optimizing global profit. Hard: 11. In a situation where the selling division has significant excess capacity, which transfer pricing method is most likely to result in goal congruence? A. Market-based transfer pricing. B. Variable cost-based transfer pricing. C. Full cost-based transfer pricing. D. Negotiated transfer pricing.  Correct Answer: B. Variable cost-based transfer pricing. 12. Which of the following is true when using a dual transfer pricing system? A. The selling division records the transfer at market price, while the buying division records it at cost. B. Both the buying and selling divisions record the transfer at a negotiated price that may differ from the market price. C. The selling division records the transfer at full cost, while the buying division records it at a different cost. D. The transfer price is set using an average of cost-based and market-based prices. Correct Answer: A. The selling division records the transfer at market price, while the buying division records it at cost. 13. When setting transfer prices in a decentralized organization, why is it important to consider the external market price? A. To ensure that the selling division is always profitable. B. To avoid any tax penalties that may arise from non-compliance with regulations. C. To maintain competitiveness and fairness between internal divisions and potential external buyers or sellers. D. To minimize the cost of goods sold for the buying division. Correct Answer: C. To maintain competitiveness and fairness between internal divisions and potential external buyers or sellers. 14. What is one of the main challenges associated with setting transfer prices in multinational corporations? A. Ensuring compliance with different countries’ tax regulations and avoiding double taxation. B. Maximizing the cost allocated to each division. C. Simplifying the financial reporting process. D. Standardizing the currency used in all transactions. Correct Answer: A. Ensuring compliance with different countries’ tax regulations and avoiding double taxation. 15. In a scenario where the transfer price is set at the variable cost of the selling division, what impact does this have on the selling division’s profitability? A. The selling division will break even on the transaction. B. The selling division will incur a loss on the transaction. C. The selling division will earn a profit that equals the contribution margin. D. The selling division’s profit will be maximized. Correct Answer: B. The selling division will incur a loss on the transaction. 16. How can transfer pricing influence a company’s global tax strategy? A. By setting high transfer prices in low-tax jurisdictions, the company can reduce its overall tax liability. B. By using transfer pricing, the company can avoid paying taxes in any jurisdiction. C. Transfer pricing has no impact on a company’s tax strategy. D. By setting low transfer prices in high-tax jurisdictions, the company can shift profits to lower-tax jurisdictions. Correct Answer: D. By setting low transfer prices in high-tax jurisdictions, the company can shift profits to lower-tax jurisdictions. 17. What is the primary disadvantage of using a negotiated transfer price? A. It ignores the actual costs of production.  B. It may lead to lengthy negotiations and potential conflicts between divisions. C. It always results in suboptimal decision-making. D. It forces divisions to rely heavily on external market data. Correct Answer: B. It may lead to lengthy negotiations and potential conflicts between divisions. 18. In which situation would a transfer price set at full cost be most appropriate? A. When the selling division is operating at full capacity. B. When the buying division is the primary customer for the product. C. When there is no active external market for the product. D. When the company’s goal is to minimize internal conflict. Correct Answer: C. When there is no active external market for the product. 19. Which of the following best describes the concept of “goal congruence” in the context of transfer pricing? A. Ensuring that the objectives of individual divisions align with the overall objectives of the company. B. Setting transfer prices that maximize the profit of the selling division only. C. Using transfer prices to manipulate financial statements for tax benefits. D. Establishing transfer prices based solely on the external market value of products. Correct Answer: A. Ensuring that the objectives of individual divisions align with the overall objectives of the company. 20. Why might a company choose to implement a dual pricing system for transfer pricing? A. To allow different divisions to report varying costs for the same transaction to achieve different internal goals. B. To provide more flexibility in adjusting prices for external customers. C. To differentiate between variable and fixed costs in interdivisional transactions. D. To ensure compliance with international tax regulations by using different prices for internal and external reporting. Correct Answer: A. To allow different divisions to report varying costs for the same transaction to achieve different internal goals. Session 9: Capital Budgeting & Investment Decisions Easy: 1. What is the primary purpose of capital budgeting? A. To determine the best way to allocate a company’s marketing budget. B. To evaluate long-term investment projects and decide which ones to pursue. C. To establish the pricing strategy for new products. D. To calculate the cost of goods sold for the company’s products. Correct Answer: B. To evaluate long-term investment projects and decide which ones to pursue. 2. Which of the following is a commonly used method in capital budgeting to evaluate investment projects? A. Contribution margin analysis. B. Net present value (NPV).  C. Absorption costing. D. Activity-based costing (ABC). Correct Answer: B. Net present value (NPV). 3. Which of the following metrics considers the time value of money when evaluating investment projects? A. Payback period. B. Accounting rate of return (ARR). C. Net present value (NPV). D. Gross profit margin. Correct Answer: C. Net present value (NPV). 4. What is the Internal Rate of Return (IRR) in capital budgeting? A. The discount rate that makes the net present value (NPV) of a project zero. B. The annual return on an investment based on accounting income. C. The interest rate charged on a company’s debt. D. The rate at which a project’s cash flows break even with its initial investment. Correct Answer: A. The discount rate that makes the net present value (NPV) of a project zero. 5. The payback period method of capital budgeting is most useful for: A. Evaluating the profitability of a project. B. Determining how quickly an investment will recover its initial cost. C. Assessing the time value of money for a project’s cash flows. D. Calculating the internal rate of return (IRR). Correct Answer: B. Determining how quickly an investment will recover its initial cost. Medium: 6. Which of the following capital budgeting techniques ignores cash flows that occur after the payback period? A. Net present value (NPV). B. Internal rate of return (IRR). C. Payback period. D. Profitability index (PI). Correct Answer: C. Payback period. 7. What does a positive Net Present Value (NPV) indicate about an investment project? A. The project’s cash flows are insufficient to cover the initial investment. B. The project will generate returns above the company’s required rate of return. C. The project has a shorter payback period than alternative investments. D. The project’s internal rate of return (IRR) is less than the required rate of return. Correct Answer: B. The project will generate returns above the company’s required rate of return. 8. When comparing two mutually exclusive projects, which capital budgeting metric should be given the most consideration? A. Payback period. B. Accounting rate of return (ARR). C. Net present value (NPV). D. Gross profit margin. Correct Answer: C. Net present value (NPV). 9. What does the profitability index (PI) measure in capital budgeting?  A. The number of years required to recover the initial investment. B. The ratio of the present value of cash inflows to the initial investment. C. The rate of return that equates the present value of cash inflows with the initial investment. D. The overall profit generated by the project over its lifetime. Correct Answer: B. The ratio of the present value of cash inflows to the initial investment. 10. Which of the following scenarios would be a reason to reject a project based on its Internal Rate of Return (IRR)? A. The IRR is lower than the company’s cost of capital. B. The IRR is higher than the Net Present Value (NPV). C. The IRR is higher than the company’s required rate of return. D. The IRR equals the payback period of the project. Correct Answer: A. The IRR is lower than the company’s cost of capital. Hard: 11. In capital budgeting, why is the Net Present Value (NPV) method generally preferred over the Internal Rate of Return (IRR) method? A. NPV does not require an estimate of the cost of capital. B. NPV provides a direct measure of the increase in value to the firm. C. NPV ignores the time value of money, making it easier to calculate. D. NPV automatically adjusts for differences in project scale and duration. Correct Answer: B. NPV provides a direct measure of the increase in value to the firm. 12. A project has a profitability index (PI) of 1.2. What does this indicate about the project? A. The project is expected to generate $1.20 in returns for every $1 invested. B. The project will break even. C. The project’s cash inflows are insufficient to cover its initial cost. D. The project should be rejected because the PI is less than 1. Correct Answer: A. The project is expected to generate $1.20 in returns for every $1 invested. 13. When using the discounted payback period method, which of the following factors is considered that is not taken into account by the traditional payback period method? A. The salvage value of the project. B. The project’s operating income. C. The time value of money. D. The total profit generated over the project’s lifetime. Correct Answer: C. The time value of money. 14. Which of the following is a limitation of the Internal Rate of Return (IRR) method in capital budgeting? A. It assumes that interim cash flows are reinvested at the project’s IRR. B. It fails to consider the project’s initial cost. C. It is less accurate than the payback period method. D. It ignores the profitability index of the project. Correct Answer: A. It assumes that interim cash flows are reinvested at the project’s IRR. 15. In the context of capital budgeting, what is “capital rationing”? A. The process of allocating limited capital resources among competing projects. B. The decision to invest only in projects with the shortest payback period. C. The rejection of all projects with a Net Present Value (NPV) below zero.  D. The analysis of a project’s internal rate of return (IRR). Correct Answer: A. The process of allocating limited capital resources among competing projects. 16. Why might a company choose to use the payback period method despite its limitations? A. It provides a quick estimate of the project’s profitability. B. It is the only method that considers the time value of money. C. It focuses on the long-term profitability of the project. D. It is useful for projects where liquidity and risk are major concerns. Correct Answer: D. It is useful for projects where liquidity and risk are major concerns. 17. Which of the following describes a situation where the NPV and IRR methods might give conflicting project rankings? A. The projects being compared have similar cash flow patterns. B. The projects are mutually exclusive and differ significantly in scale and timing of cash flows. C. The projects have the same initial investment but different payback periods. D. The projects have a profitability index (PI) greater than 1. Correct Answer: B The projects are mutually exclusive and differ significantly in scale and timing of cash flows. 18. What is the primary purpose of sensitivity analysis in capital budgeting? A. To determine the exact profit generated by an investment project. B. To evaluate how changes in key assumptions affect the projected outcomes of a project. C. To identify the project with the shortest payback period. D. To rank projects based on their profitability index (PI). Correct Answer: B. To evaluate how changes in key assumptions affect the projected outcomes of a project. 19. Which of the following is a disadvantage of using the payback period method in capital budgeting? A. It ignores the timing of cash flows. B. It does not consider the total profitability of a project. C. It overemphasizes the importance of the time value of money. D. It is too complex for most decision-makers to use effectively. Correct Answer: B. It does not consider the total profitability of a project. 20. If a company is using capital rationing and has to choose between several projects, which metric would generally be most appropriate for making the decision? A. Payback period. B. Net present value (NPV). C. Internal rate of return (IRR). D. Accounting rate of return (ARR). Correct Answer: B. Net present value (NPV). Session 10: Investment Center Performance (ROI, RI, EVA) Easy: 1. What does ROI (Return on Investment) measure in the context of investment center performance? A. The total revenue generated by the investment center. B. The efficiency with which the investment center uses its assets to generate profits. C. The total costs incurred by the investment center. D. The amount of cash flows produced by the investment center. Correct Answer: B. The efficiency with which the investment center uses its assets to generate profits. 2. Which of the following best defines Residual Income (RI)? A. The profit remaining after all operating expenses have been deducted. B. The net operating income earned above the minimum required return on a company’s assets. C. The total revenue minus total expenses of an investment center. D. The amount of cash left after paying off all liabilities. Correct Answer: B. The net operating income earned above the minimum required return on a company’s assets. 3. Economic Value Added (EVA) is calculated by: A. Subtracting total costs from total revenue. B. Subtracting the cost of capital from net operating profit after taxes (NOPAT). C. Adding back non-cash expenses to net income. D. Subtracting dividends paid from net income. Correct Answer: B. Subtracting the cost of capital from net operating profit after taxes (NOPAT). 4. Which of the following is a potential limitation of using ROI as a performance measure? A. It does not consider the size of the investment. B. It ignores the time value of money. C. It encourages managers to accept any project that has a positive return, regardless of the cost of capital. D. It can lead to underinvestment if managers focus solely on maximizing ROI. Correct Answer: D. It can lead to underinvestment if managers focus solely on maximizing ROI. 5. What is the primary advantage of using Residual Income (RI) over ROI? A. RI is easier to calculate than ROI. B. RI takes into account the cost of capital, encouraging managers to invest in projects that increase shareholder value. C. RI is more widely accepted as a measure of financial performance. D. RI does not require any adjustments for accounting distortions. Correct Answer: B. RI takes into account the cost of capital, encouraging managers to invest in projects that increase shareholder value. Medium: 6. Which of the following metrics directly incorporates the cost of capital into its calculation? A. Return on Investment (ROI). B. Residual Income (RI). C. Earnings Before Interest and Taxes (EBIT). D. Gross Profit Margin. Correct Answer: B. Residual Income (RI). 7. How does Economic Value Added (EVA) differ from traditional accounting profit? A. EVA includes non-operating income in its calculation. B. EVA adjusts for the cost of equity and debt capital, while traditional accounting profit does not. C. EVA focuses only on cash flows, while traditional accounting profit includes non-cash items. D. EVA ignores the tax implications of an investment. Correct Answer: B. EVA adjusts for the cost of equity and debt capital, while traditional accounting profit does not. 8. When comparing two investment centers, which measure would provide the most meaningful comparison if the centers differ significantly in size? A. Return on Investment (ROI). B. Residual Income (RI). C. Gross Profit Margin. D. Operating Income. Correct Answer: B. Residual Income (RI). 9. Why might a company prefer to use Economic Value Added (EVA) over Residual Income (RI) as a performance measure? A. EVA does not require any adjustments for accounting differences. B. EVA provides a more accurate reflection of value creation by adjusting for the economic cost of capital. C. EVA is simpler to calculate than RI. D. EVA is focused solely on short-term financial performance. Correct Answer: B. EVA provides a more accurate reflection of value creation by adjusting for the economic cost of capital. 10. Which of the following could lead to an increase in an investment center’s ROI? A. Increasing operating expenses without increasing revenues. B. Reducing the asset base while maintaining the same level of net operating income. C. Investing in new assets that generate returns below the company’s cost of capital. D. Increasing the asset base while maintaining the same level of revenues. Correct Answer: B. Reducing the asset base while maintaining the same level of net operating income. Hard: 11. How does Residual Income (RI) encourage managers to align their decisions with the company’s overall financial goals? A. By focusing exclusively on maximizing net income. B. By ensuring that managers invest only in projects with the highest ROI. C. By rewarding managers for generating income above the required return on assets. D. By penalizing managers for taking on projects with a long payback period. Correct Answer: C. By rewarding managers for generating income above the required return on assets. 12. Which of the following scenarios would most likely result in a negative Economic Value Added (EVA)? A. A project generates a return higher than the company’s cost of capital. B. A project’s operating profit is less than the total cost of capital employed. C. The company’s operating income increases year over year.  D. The project has a short payback period. Correct Answer: B. A project’s operating profit is less than the total cost of capital employed. 13. Which of the following best describes the relationship between ROI and Residual Income (RI)? A. Both metrics always produce the same project rankings. B. ROI focuses on profitability relative to assets, while RI considers the cost of capital and absolute profitability. C. RI is a simpler and more commonly used metric than ROI. D. ROI and RI are identical except for the way they treat taxes. Correct Answer: B. ROI focuses on profitability relative to assets, while RI considers the cost of capital and absolute profitability. 14. How can Economic Value Added (EVA) be used to evaluate the performance of different divisions within a company? A. By comparing the total sales revenue generated by each division. B. By calculating the profit each division generates above its cost of capital. C. By measuring the difference between budgeted and actual expenses. D. By analyzing the growth rate of each division’s revenues. Correct Answer: B. By calculating the profit each division generates above its cost of capital. 15. Which of the following is a key reason for using ROI as a performance measure? A. ROI does not require any adjustments for accounting differences. B. ROI allows for easy comparison between divisions of different sizes. C. ROI is directly related to shareholder value and company-wide goals. D. ROI provides a straightforward percentage that reflects how well a division is utilizing its assets to generate profits. Correct Answer: D. ROI provides a straightforward percentage that reflects how well a division is utilizing its assets to generate profits. 16. Which of the following is a potential disadvantage of using ROI for evaluating investment center performance? A. ROI encourages excessive investment in assets to increase the ratio. B. ROI may lead managers to reject profitable projects that could lower the division’s overall ROI. C. ROI is too complex and difficult to calculate. D. ROI ignores the impact of operating income on the division’s overall performance. Correct Answer: B. ROI may lead managers to reject profitable projects that could lower the division’s overall ROI. 17. How can Residual Income (RI) help mitigate the “underinvestment problem” that can occur with ROI? A. RI considers only the revenue generated by the investment. B. RI focuses on maximizing the percentage return rather than absolute profits. C. RI rewards managers for any profit generated above the required return, even if it lowers the ROI percentage. D. RI eliminates the need for capital budgeting decisions.  Correct Answer: C. RI rewards managers for any profit generated above the required return, even if it lowers the ROI percentage. 18. Which of the following adjustments is typically made when calculating Economic Value Added (EVA) to ensure it accurately reflects value creation? A. Adding back non-operating expenses. B. Subtracting non-cash expenses such as depreciation. C. Adjusting for the cost of both equity and debt capital. D. Including all fixed costs in the calculation. Correct Answer: C. Adjusting for the cost of both equity and debt capital. 19. When would it be more appropriate to use Economic Value Added (EVA) rather than ROI for performance measurement? A. When comparing divisions of similar size with different levels of investment. B. When assessing the overall economic profitability of a division, including the cost of capital. C. When focusing solely on the efficiency of asset utilization without considering capital costs. D. When evaluating short-term financial performance with minimal capital investment. Correct Answer: B. When assessing the overall economic profitability of a division, including the cost of capital. 20. If a division’s Economic Value Added (EVA) is negative, what does this imply? A. The division is generating returns that are greater than the company’s cost of capital. B. The division’s operating profit does not cover the cost of capital, leading to a destruction of shareholder value. C. The division is performing well in terms of asset utilization but not in profitability. D. The division’s expenses exceed its revenues. Correct Answer: B. The division’s operating profit does not cover the cost of capital, leading to a destruction of shareholder value. These questions provide a comprehensive review of the core concepts from Sessions 6-10. Each set of questions covers key topics such as Activity-Based Costing, Performance Control, Transfer Pricing, Capital Budgeting, and Investment Center Performance, blending easy, medium, and hard questions to challenge and reinforce understanding. If you need further explanations or additional questions, feel free to ask! Sure! Below are challenging, conceptual questions based on the content from the slides and deepened with insights from the textbook (Sivaramakrishnan, Konduru, and Sprinkle), focusing on the more advanced or nuanced aspects of each topic. Session 6: Activity-Based Costing (ABC) 1. How does the selection of cost drivers in Activity-Based Costing (ABC) impact the accuracy of product cost information, and what are the potential consequences of choosing too many or too few cost drivers? A. Choosing too many cost drivers increases accuracy but significantly raises implementation costs, potentially outweighing the benefits.  B. Choosing too few cost drivers can simplify the system but risks oversimplification, leading to distorted cost allocations that may misinform pricing and product decisions. C. The selection of cost drivers does not significantly impact the accuracy of product costs in ABC as long as major activities are captured. D. The accuracy of product cost information is solely dependent on the amount of overhead costs and not on the selection of cost drivers. Correct Answer: B. Choosing too few cost drivers can simplify the system but risks oversimplification, leading to distorted cost allocations that may misinform pricing and product decisions. 2. In a highly automated production environment, what challenges might a company face when implementing an ABC system, particularly in terms of activity selection and cost allocation? A. Automation typically reduces overhead costs, making ABC less beneficial. B. Identifying relevant activities becomes more complex due to the reduced role of direct labor, and significant automation can lead to misallocation of overhead if the wrong drivers are chosen. C. ABC systems are easier to implement in automated environments because machine usage is a straightforward cost driver. D. The reduction in direct labor costs simplifies the selection of activities, making cost allocation more accurate. Correct Answer: B. Identifying relevant activities becomes more complex due to the reduced role of direct labor, and significant automation can lead to misallocation of overhead if the wrong drivers are chosen. 3. What is the main risk of using a traditional costing system in a company with diverse product lines, and how does ABC address this issue? A. Traditional costing may understate the costs of complex products and overstate the costs of simpler products, while ABC assigns costs more accurately based on actual resource consumption by each product. B. Traditional costing overstates the costs of all products, and ABC further increases these overstatements by adding complexity. C. Traditional costing simplifies cost allocation by using a single cost pool, which increases cost accuracy compared to ABC. D. ABC uses fewer cost drivers, reducing the risk of misallocation, while traditional costing spreads costs evenly across all products. Correct Answer: A. Traditional costing may understate the costs of complex products and overstate the costs of simpler products, while ABC assigns costs more accurately based on actual resource consumption by each product. 4. Discuss the potential drawbacks of implementing an Activity-Based Costing system in a service organization with highly customized service offerings. A. ABC systems are not suitable for service organizations because they rely heavily on physical production activities as cost drivers. B. The customization of services may lead to the identification of too many cost pools, complicating the system and increasing administrative costs without significant accuracy gains. C. ABC simplifies the cost allocation in service organizations by focusing on direct labor, reducing the need for multiple cost drivers.  D. Service organizations do not benefit from ABC as much as manufacturing firms because overhead costs are usually lower and less complex. Correct Answer: B. The customization of services may lead to the identification of too many cost pools, complicating the system and increasing administrative costs without significant accuracy gains. Session 7: Performance Control (Variance Analysis & Balanced Scorecard) 5. In the context of variance analysis, explain how the relationship between fixed and variable costs can complicate the interpretation of volume variances. A. Volume variances are straightforward to interpret because they only affect variable costs. B. Fixed costs are unaffected by volume changes, so they do not influence volume variances. C. The allocation of fixed costs across different production levels can cause volume variances to either overstate or understate the impact on profitability, especially when production levels fluctuate significantly. D. Volume variances only reflect the impact of changes in sales volume, ignoring any cost structure variations. Correct Answer: C. The allocation of fixed costs across different production levels can cause volume variances to either overstate or understate the impact on profitability, especially when production levels fluctuate significantly. 6. What are the potential risks associated with overemphasizing financial metrics in a Balanced Scorecard approach, and how can this affect long-term strategic goals? A. Overemphasis on financial metrics can lead to short-term decision-making that undermines investments in customer relationships, internal processes, and innovation, potentially jeopardizing long-term strategic goals. B. Financial metrics provide the most accurate picture of company performance, so overemphasizing them does not pose any significant risks. C. Overemphasis on financial metrics leads to better long-term profitability because it focuses on the bottom line. D. Financial metrics in the Balanced Scorecard are only one part of the performance puzzle, so they cannot be overemphasized. Correct Answer: A. Overemphasis on financial metrics can lead to short-term decision-making that undermines investments in customer relationships, internal processes, and innovation, potentially jeopardizing long-term strategic goals. 7. In a Balanced Scorecard, why might there be a trade-off between improving customer satisfaction and increasing financial performance in the short term? A. Improving customer satisfaction often requires significant upfront investments that may reduce short-term profitability but are intended to enhance long-term financial performance. B. Customer satisfaction initiatives typically lower costs and immediately improve financial performance. C. Customer satisfaction has no direct impact on financial performance. D. The trade-off exists because customer satisfaction metrics do not align with any other perspectives in the Balanced Scorecard. Correct Answer: A. Improving customer satisfaction often requires significant upfront investments that may reduce short-term profitability but are intended to enhance long-term financial performance. 8. Explain the importance of linking non-financial metrics in the Balanced Scorecard to long-term strategic objectives and how failure to do so might undermine the effectiveness of the scorecard. A. Non-financial metrics are important but do not need to be linked to strategic objectives as long as they reflect operational performance. B. Linking non-financial metrics to strategic objectives ensures that efforts in areas like customer satisfaction, internal processes, and learning and growth contribute directly to the organization’s long-term success, whereas failing to establish this link can lead to misalignment and suboptimal resource allocation. C. Non-financial metrics should be kept separate from strategic objectives to maintain focus on short-term financial performance. D. The effectiveness of the Balanced Scorecard is determined solely by the accuracy of its financial metrics, not by the linkage of non-financial metrics to strategic objectives. Correct Answer: B. Linking non-financial metrics to strategic objectives ensures that efforts in areas like customer satisfaction, internal processes, and learning and growth contribute directly to the organization’s long-term success, whereas failing to establish this link can lead to misalignment and suboptimal resource allocation. Session 8: Transfer Pricing 9. How might the use of market-based transfer prices in a company with decentralized divisions affect the motivation of division managers, and what potential conflicts could arise? A. Market-based transfer prices ensure fairness but can lead to conflicts if one division perceives the price as too high or too low compared to external options, potentially demotivating managers if they feel disadvantaged. B. Market-based transfer prices remove all potential conflicts as they reflect external market conditions. C. Using market-based transfer prices always motivates managers by aligning their performance with market conditions. D. Market-based transfer prices are likely to demotivate managers because they do not consider the company’s internal cost structure. Correct Answer: A. Market-based transfer prices ensure fairness but can lead to conflicts if one division perceives the price as too high or too low compared to external options, potentially demotivating managers if they feel disadvantaged. 10. In a situation where a selling division is operating at full capacity, how should transfer prices be set to ensure goal congruence, and what factors must be considered? A. The transfer price should be set at the variable cost to maximize overall corporate profit. B. The transfer price should be set at the market price or above to ensure that the selling division’s profitability is not compromised, considering the opportunity cost of selling externally. C. The transfer price should be negotiated without considering market conditions, as internal transactions should prioritize overall company goals. D. The transfer price should be based solely on the full cost of production to ensure that all costs are covered. Correct Answer: B. The transfer price should be set at the market price or above to ensure that the selling division’s profitability is not compromised, considering the opportunity cost of selling externally. impact overall corporate strategy. A. Transfer pricing has no impact on taxation as it is purely an internal matter. B. Multinational corporations must carefully set transfer prices to comply with international tax laws, as inappropriate transfer pricing can lead to tax penalties, double taxation, or accusations of profit shifting, which can significantly affect corporate strategy and profitability. C. Transfer pricing only impacts taxation if the transactions are between unrelated parties. D. Transfer pricing decisions are solely for internal performance measurement and have no bearing on corporate strategy. Correct Answer: B. Multinational corporations must carefully set transfer prices to comply with international tax laws, as inappropriate transfer pricing can lead to tax penalties, double taxation, or accusations of profit shifting, which can significantly affect corporate strategy and profitability. 12. How might the choice between cost-based and market-based transfer pricing methods affect the autonomy and decision-making power of division managers in a decentralized organization? A. Cost-based transfer pricing gives managers more autonomy because it allows them to influence internal costs directly. B. Market-based transfer pricing reduces managers’ autonomy by tying internal prices to external market conditions, which may not reflect the division’s actual cost structure. C. Both cost-based and market-based transfer pricing methods equally enhance managerial autonomy by ensuring that divisions are evaluated on objective criteria. D. Cost-based transfer pricing reduces managers’ autonomy by imposing a standard cost structure on all divisions. Correct Answer: B. Market-based transfer pricing reduces managers’ autonomy by tying internal prices to external market conditions, which may not reflect the division’s actual cost structure. 13. Explain the concept of dual transfer pricing and its potential benefits and drawbacks in achieving goal congruence within a company. A. Dual transfer pricing involves setting two different prices for the same transaction, one for internal purposes and one for external reporting, which can simplify goal congruence but may lead to confusion and complexity in financial reporting. B. Dual transfer pricing eliminates all conflicts between divisions by allowing each division to set its own price for internal transfers. C. Dual transfer pricing is primarily used to reduce tax liabilities by reporting different prices in different jurisdictions. D. Dual transfer pricing helps achieve goal congruence by allowing the selling division to be credited at market price while the buying division is charged at cost, but it can be complex to administer and may lead to inconsistencies in performance evaluation. Correct Answer: D. Dual transfer pricing helps achieve goal congruence by allowing the selling division to be credited at market price while the buying division is charged at cost, but it can be complex to administer and may lead to inconsistencies in performance evaluation. Session 9: Capital Budgeting & Investment Decisions 14. How does capital rationing influence the decision-making process in capital budgeting, and what are the potential risks of using non-discounted cash flow methods in this context?  A. Capital rationing simplifies decision-making by focusing only on projects with the shortest payback periods, but using non-discounted cash flow methods like payback period or accounting rate of return (ARR) may lead to the selection of projects that do not maximize shareholder value. B. Capital rationing requires the use of non-discounted cash flow methods to ensure that projects with the highest ROI are selected, minimizing risks. C. Non-discounted cash flow methods are more reliable under capital rationing because they provide a straightforward measure of project profitability. D. Capital rationing encourages the use of discounted cash flow methods to avoid risks associated with selecting projects that do not consider the time value of money. Correct Answer: A. Capital rationing simplifies decision-making by focusing only on projects with the shortest payback periods, but using non-discounted cash flow methods like payback period or accounting rate of return (ARR) may lead to the selection of projects that do not maximize shareholder value. 15. When evaluating mutually exclusive projects, why might the Net Present Value (NPV) method provide more reliable results than the Internal Rate of Return (IRR) method, especially when comparing projects with different cash flow patterns? A. The IRR method is more accurate than NPV for projects with irregular cash flows. B. The NPV method accounts for the scale and timing of cash flows, which can lead to a more reliable comparison of mutually exclusive projects, especially when the projects have different cash flow patterns or durations. C. The NPV method ignores the time value of money, making it less reliable than IRR for comparing different projects. D. The IRR method always provides a higher ranking for projects, making it preferable to NPV in most cases. Correct Answer: B. The NPV method accounts for the scale and timing of cash flows, which can lead to a more reliable comparison of mutually exclusive projects, especially when the projects have different cash flow patterns or durations. 16. Explain the importance of sensitivity analysis in capital budgeting and how it helps in understanding the potential impact of key assumptions on project viability. A. Sensitivity analysis is primarily used to simplify the capital budgeting process by removing uncertain variables from consideration. B. Sensitivity analysis helps decision-makers understand how changes in key assumptions, such as discount rates, project lifespan, or cash inflows, can impact the viability and risk profile of an investment project, enabling better risk management. C. Sensitivity analysis is unnecessary if a project has a high Net Present Value (NPV). D. Sensitivity analysis replaces the need for other capital budgeting methods by providing a definitive measure of project success. Correct Answer: B. Sensitivity analysis helps decision-makers understand how changes in key assumptions, such as discount rates, project lifespan, or cash inflows, can impact the viability and risk profile of an investment project, enabling better risk management. Session 10: Investment Center Performance (ROI, RI, EVA) 17. How might the focus on maximizing ROI as a performance measure lead to underinvestment in long-term projects, and what alternative measures can help mitigate this issue?  A. Maximizing ROI encourages managers to invest in long-term projects because they typically have higher returns. B. Focusing solely on ROI can lead to underinvestment in long-term projects with lower immediate returns, as managers may avoid projects that could reduce the division’s overall ROI; alternative measures like Residual Income (RI) or Economic Value Added (EVA) consider the cost of capital and can encourage investment in value-adding projects. C. ROI automatically adjusts for the time value of money, so it does not influence investment decisions. D. Underinvestment in long-term projects is not a concern if ROI is used correctly. Correct Answer: B. Focusing solely on ROI can lead to underinvestment in long-term projects with lower immediate returns, as managers may avoid projects that could reduce the division’s overall ROI; alternative measures like Residual Income (RI) or Economic Value Added (EVA) consider the cost of capital and can encourage investment in value-adding projects. 18. Discuss how Economic Value Added (EVA) provides a more comprehensive measure of performance compared to traditional accounting profit, particularly in the context of capital-intensive industries. A. EVA is less relevant in capital-intensive industries because it focuses on cash flow rather than profit. B. EVA adjusts for the cost of both equity and debt capital, offering a more accurate reflection of value creation than traditional accounting profit, which does not account for the economic cost of capital, making EVA particularly useful in capital-intensive industries where large investments are common. C. Traditional accounting profit is always a better measure than EVA because it is easier to calculate. D. EVA and accounting profit are essentially the same, as both measure profitability. Correct Answer: B. EVA adjusts for the cost of both equity and debt capital, offering a more accurate reflection of value creation than traditional accounting profit, which does not account for the economic cost of capital, making EVA particularly useful in capital-intensive industries where large investments are common. 19. In what way does Residual Income (RI) address the limitations of ROI in evaluating the performance of investment centers, particularly in terms of goal congruence? A. RI is limited by the same factors as ROI and does not provide any additional insights into goal congruence. B. RI considers the opportunity cost of capital, encouraging managers to pursue projects that contribute positively to the company’s overall value, even if those projects might lower the division’s ROI, thus better aligning divisional goals with corporate objectives. C. RI eliminates the need for performance evaluation by focusing on long-term goals. D. RI focuses solely on short-term profitability, making it less effective than ROI in promoting goal congruence. Correct Answer: B. RI considers the opportunity cost of capital, encouraging managers to pursue projects that contribute positively to the company’s overall value, even if those projects might lower the division’s ROI, thus better aligning divisional goals with corporate objectives. 20. Explain why EVA might be preferred over ROI and RI when evaluating the performance of investment centers in a multinational corporation, particularly in relation to capital allocation decisions. A. EVA ignores the cost of capital, making it simpler to use in multinational settings.  B. EVA provides a more accurate measure of true economic profit by accounting for the cost of capital, making it a superior tool for evaluating the performance of investment centers, especially in capital-intensive environments where the allocation of resources is critical to maximizing shareholder value. C. EVA simplifies performance evaluation by focusing solely on revenue generation. D. EVA is less sensitive to changes in market conditions than ROI or RI, making it a more stable measure across different economic environments. Correct Answer: B. EVA provides a more accurate measure of true economic profit by accounting for the cost of capital, making it a superior tool for evaluating the performance of investment centers, especially in capital-intensive environments where the allocation of resources is critical to maximizing shareholder value.