A Drawback of Short-Term Contracting as an Alternative to Making

question 14

Multiple Choice

A drawback of short-term contracting as an alternative to making a component in-house is that

• A) it is the most-integrated alternative to performing an activity so the principal company has no control over the agent.
• B) the supplying firm has no incentive to make any transaction-specific investments to increase performance or quality.
• C) it fails to allow a long planning period that individual market transactions provide.
• D) the buying firm cannot demand lower prices due to the lack of a competitive bidding process.

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Definitions:

Deferred Income Taxes

Tax liabilities that arise due to timing differences between the recognition of income and expenses in the financial statements and their recognition in the tax returns, deferred to future periods.

Life Insurance Proceeds

The amount of money paid out to the beneficiary of a life insurance policy upon the death of the insured or at the policy's maturity.

Deferred Tax Liability

An accounting term representing a tax obligation that a company owes but is allowed to pay at a future date.

Pretax Accounting Income

Income earned by a business before taxation has been deducted, as recorded in its financial accounts.