Chapter 10: Managing Divisional Performance

Question 1

4 types of responsibility centres

Answer 1

Investment
profit
revenue
cost

(heirarchical structure)

Question 2

Benefits of Divisionalisation

Answer 2

1. Market information - front line managers know more
2. Motivation - increases motivation, feel influential
3. Development - autonomy and exposure
4. Improved decision making Specialist knowledge
5. Improved HO effectiveness as top managers take strategic role
6. Timely decision - quick response times
7. Diversification - portfolio reduces risk

Question 3

Problems with divisionalisation

Answer 3

Goal conflict
risk avoidance
management perks
increasing costs (no economies of scale)
competition - interbusiness, may not be optimal

Question 4

Managing divisional performance

Answer 4

1. Contribution - can be manipulated by changes in gearing
2. controllable profit - takes all expenses manager is in control of, but may be difficult to categorise
3. divisional performance before common expenses - assesses division, not manager
4. divisional profit - includes share of marketing, HR etc and in real life hard to divide these

Question 5

2 issues of ROI

Answer 5

profitability measure so risks managers acting out of line with principles
ignores cost of financing a division

Question 6

Residual Income formula

Answer 6

Div profit - charge on capital invested

Question 7

Issue with RI

Answer 7

focus on short term at potential cost to long term.

Question 8

4 things to compare divisional performance to

Answer 8

1. other divisions
2. previous performance
3. similar business in industry
4. budgeted performance

Question 9

Objectives of transfer pricing

Answer 9

• increases inter-dependance so motivation
• helps assess performance as contributes to sales
• optimises profit of business
• allocation of divisional resources
• tax minimalisation

Question 10

Transfer pricing policies

Answer 10

1. market pricing
2. variable cost (when div operating below capacity)
3. full cost (passes costs on)
4. negotiated (disputes, arbitration)
5. administered

could have different prices for buying and selling division to optimise behaviour but would profits of two would no longer equal the sum

Question 11

Examples of non - financial measures of performance

Answer 11

product/service quality
staff training/ morale
market share
environment/social concern

Question 12

What is ery important about non financial measures?

Answer 12

help link strategy to performance