ECOS3003 Tutorial 8 1
Hierarchies, incentives and firm structure ECOS3003
Tutorial 8
1. Which of the following is not required in cost centre performance-evaluation systems?
(a) The output must be measurable
(b) The quality must be easily observable
(c) The optimal input combination must be known when setting goals
(d) The optimal output level (or budget) must be known when setting objectives.
2. One problem with measuring revenue centre performance is that if given decision rights over
price, revenue maximisation is inconsistent with profit maximisation. One way to resolve the problem may
be to charge them for the products they sell. Does this resolve the issue?
3. A firm has a demand curve P = 6600 - 10Q. Its total costs are TC = Q2. What are the optimal
output, price and profits of the firm?
Now assume that the firm is divided into two profit centres. One division manufactures the product at a
total cost of TC = Q2, then transfers it to a selling division that faces the firm’s demand curve. The selling
division has no costs other than the transfer price and that the selling division can only buy internally. The
selling division, however can select the quantity to purchase. What transfer price will the manufacturing
unit select? What are the resulting profits for the two units? From the firm’s standpoint, what is the optimal
transfer price?
4. Question 17.1
5. Question 17.3
6 Question 17.4
7. Read the case study on page 545 and answer the two questions