Managers Whose Bonuses Are Based on Operating Income Have More

question 157

True/False

Managers whose bonuses are based on operating income have more incentive to increase inventory levels when variable costing is used than when absorption costing is used.

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Definitions:

Entrepreneur's Forgone Interest

The potential revenue lost by investing in one's own business instead of utilizing those funds in an alternative investment.

Normal Profit

The level of profit necessary for a company to remain competitive in the market, covering opportunity costs, but not creating economic profit.

Economic Profit

The difference between the total revenue generated by a business and the total costs of production, including both explicit and implicit costs.

Entrepreneur's Potential Earnings

Represents the possible income or profits an entrepreneur can expect to make from their business ventures, considering risks and the opportunity cost of alternative employment.