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This addresses under & over investing & transfer prices.

E 12-13

Explain why the senior managers at Quantum have an incentive to overinvest:
Explain why senior managers at Aquafinn have incentive to underinvest:

P 12-16

Suggest a transfer price for the fabric assuming that the Fabric Division is operating at only 60% capacity due to a surge in popularity of easy care fabrics made of polyester and rayon.

Explain how your choices are related to the opportunity cost concept.

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E 12-13

Explain why the senior managers at Quantum have an incentive to overinvest:

Management increased profits by buying into investments that yielded a low return. The senior managers increased profit but allowed ROI to decrease. Because returns were in the good (positive), there was a coordinating increase in income. Senior managers are evaluated in terms of increases of profit, giving the managers an automatic incentive to overinvest, causing them to choose projects specifically that have a rate of return that is less than the required rate.

Explain why senior managers at Aquafinn have incentive to ...

Solution Summary

The solution provides a detailed explanation to E 12-13 and P 12-16, which include explaining why the senior managers at Quantum have an incentive to overinvest, why senior managers at Aquafinn have incentive to underinvest, and suggesting transfer prices for fabric assuming that the Fabric Division is operating at only 60% capacity due to a surge in popularity of easy care fabrics made of polyester and rayon. All additional case questions are answered in the complete solution.

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