Questions on Organization's Management and Finance

Explain agency costs and give several examples of them (15 points).

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Agency costs are the economic sacrifices incurred by the principal so as to mitigate the adverse externalities of agency relationship.

Agency costs include:

Financial incentives e.g. Bonus compensation

Insurance costs

Auditing cost

Monitoring costs e.g. CCVT system

Legal costs

Explain how an organization can be structured to delegate responsibility to its managers and the typical controls to determine their performance (10 points).

Delegation is a function of organization function of management. Decentralization of authority and responsibility is enhances as organization to delegate. Delegation may take the following organizational structures into shape:

Functional/departmental organization structure.

Line organizational structure.

Project organizational structure

Matrix organizational structure

Project organizational structure

Free form organizational structure

Typical controls:

Budgetary control

Screening control

Post action control

Financial audits

Bureaucratic control

Integrating strategy and control.

A national corporation, Fast Print, decided to expand into several developing countries. The corporation has been managed under a centralized organization form, but is considering changing to a decentralized form. List the advantages and disadvantages of making this change (15 points).

Advantages of Decentralization:

Improves the quality of decisions since more people are involved, therefore better results.

Executives are relieved routine duties therefore offers better leadership.

Faster and quicker decision-making.

Reduces operations and business risk since more people are handling the business managerial needs.

Offers flexibility of due to delegation of authority is allowed.

Facilitate unified and effective control

Facilitate fast growth and diversification.

Demerits of Decentralization.

There is high risk of inexperience delegation of control.

Lack of morale.

Lack of unit of command leads to poor discipline.

Encourages buck passing

Delayed decisions due to extensive consultancy of specialists in each department for not routine decisions.

The following selected data pertain to Brannard Companys Construction Division for last year.

Sales $2,000,000

Variable costs $1,200,000

Traceable fixed costs $200,000

Average invested capital (assets) $3,000,000

Current liabilities $200,000

Required rate of return 15%

Marginal tax rate 36%

Weighted average cost of capital 12%

Required;

Calculate the residual income (10 points).

Residual Income= Operating income- cost of capital

Net operating income=2000000-12000000=800,000RI=$800000-300000012%RI= 800000-36000=$764000)

Calculate the return on investment (10 points).

ROI= Net IncomeCapital Invested= (2000000-(1200000+200000))(1-36%)3000000100=3840003000000100=12.8%

Calculate the economic value added (10 points).

EV= Net Income= EADIT=2000000-1200000+2000001-36%=$384000Oslo Companys industrial photo-finishing division, rho incurred the following costs and expenses in the last period

Variable Fixed

Direct material $200,000

Direct labor $150,000

Factory overhead $70,000 $42,000

General, selling, and administrative $30,000 $48,000

Totals $450,000 $90,000

During the period, Rho produced 300,000 units of industrial photo prints, which were sold for $2.00 each. Oslo's investment in Rho was $500,000 and $700,000 at the beginning and end of the year, respectively. Oslo's weighted average cost of capital and required rate of return is 15%.

Required:

Determine Rhos return on investment for the year (10 points).

ROI= Net IncomeCapital Invested100%;Net income=sales-total cost.sales=300,0002.00=$600000total cost=variable cost+fixed cost=$450000+$90000=$540000ROI= 600000-540000500000+7000002100%= 60000600000100=10%)Computer rhos residual income (loss) for the year (5 points).

RI=sales-Variable costs=600000-450000=$150000)How many industrial photo print units did Rho have to sell during the year to break even (10 points)?

=fixed costsCM, cm=selling price-unit variable costcm=2.00-450000300000=$0.5Breakeven units= $90000$0.5=180000 unitsWhat was Rhos contribution margin for the year (5 points)?

Contribution margin for the year

cm=selling price-unit variable costcm=2.00-450000300000=$0.5Total contribution =$0.5300000=$150000