Time: 3 Hours
Question 1 Select the best answer for each of the following unrelated items. Answer each of these items in your examination booklet by giving the number of your choice. For example, if the best answer for item (a) is (1), write (a)(1) in your examination booklet. If more than one answer is given for an item, that item will not be marked. Incorrect answers will be marked as zero. Marks will not be awarded for explanations. Note: 11/2 marks each
Which of the following is a disadvantage of outsourcing? 1) 2) 3) 4) Outsourcing increases transaction costs. Outsourcing limits a firm’s flexibility. Outsourcing increases risks. Outsourcing increases operating costs.
b. Which of the following is an example of a formal control system within an organization? 1) 2) 3) 4) c. Corporate culture Ethics and values Management style Strategic plans
Which of the following best describes the Sullivan Principles as a control system? 1) 2) 3) 4) A set of standards used to measure social responsibility in enterprises A set of principles describing the norms and expected behaviour of all employees A set of measures to help determine whether a company is performing to expectations A formal information system designed to focus managers’ attention on key strategic issues
d. Agency theory makes some simplifying assumptions about people’s behaviour. Which of the following is an example of these assumptions? 1) 2) 3) 4) e. People are self-interested and irrational. People are honest and maximize wealth. People are rational and maximize wealth. People are honest and self-interested.
The assertion that managers should be held responsible for only those decisions over which they have authority is related to what principle? 1) 2) 3) 4) The agency principle The authority principle The controllability principle The management principle
EMA2M11 ©CGA-Canada, 2011 Page 1 of 9
Use the following information to answer parts (f) and (g).
The manager of a retail store earns an annual salary of $120,000. Head office wants to add a motivating bonus to the manager’s fixed salary. A bonus will be added if this year’s sales are at least 25% greater than last year’s level and a penalty will be imposed if sales are more than 25% less than last year. The compensation will be as follows: If sales are < 75% of last year’s level If sales are between 75% and 125% of last year’s level If sales are > 125% of last year’s level Assume that all three outcomes are equally probable. f. The prospect of a $15,000 penalty worries the manager, so the manager has negotiated to reduce it to $7,500 so that the low sales compensation would be $112,500. What is the certain equivalent of this bonus scheme? 1) 2) 3) 4) $117,500 $120,000 $122,500 $125,000 $105,000 $120,000 $135,000
g. What is the risk premium if the certain equivalent of this bonus scheme is $130,000? 1) 2) 3) 4) $ 0 $ 5,000 $10,000 $15,000
h. Which of the following best defines an assessment cost? 1) Activities undertaken to prevent adverse environmental impacts 2) Activities undertaken to monitor areas that have the potential to have a negative impact on the environment 3) Activities that control toxic materials and their use 4) Activities undertaken to clean up damages resulting from an environmental failure i. Which of the following would likely eliminate the motivation for managers to engage in earnings management? 1) 2) 3) 4) j. Use operating income to evaluate managers’ performance Use net income to evaluate managers’ performance Use share price to evaluate managers’ performance Use net income and share price to evaluate managers
Which of the following should be classified as a product-sustaining cost? 1) 2) 3) 4) Acquisition cost of computerized design software Delivery costs Depreciation of manufacturing equipment Procurement costs