When Diversification Combines Two Businesses in Different Industrial Sectors,the Key

question 11

Multiple Choice

When diversification combines two businesses in different industrial sectors,the key determinant of whether the diversification creates value is whether the diversification:

• A)Changes the debt/equity ratio of the combined company.
• B)Is between culturally-compatible businesses.
• C)Causes management to lose its focus on its core business.
• D)Enhances the competitive advantage of either or both of the two businesses.

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Definitions:

Differential Cost

is the change in a company's cost of producing goods or services under two different action alternatives, essentially the cost difference between two choices.

Unused Capacity

The available but not utilized production ability of a company which could potentially generate revenue if employed.

Unit Cost

The cost incurred to produce, store, or acquire one unit of a product, calculated by dividing the total cost by the number of units.

Differential Cost

The difference in cost between two alternative decisions or scenarios.