The Managers of Alpha and Beta Must Make Repeated Advertising

question 18

Multiple Choice

The managers of Alpha and Beta must make repeated advertising decisions simultaneously at the beginning of every month.They choose either low or high levels of advertising expenditure.They both employ a discount rate of 2.5 percent per month. Beta expects punishment to last for two months after being caught i.e.,to be penalized in months 2 and 3) .What would be the value-maximizing decision for Beta?

• A)Cooperate since $3,000 > PV_{Benefits of cheating}.
• B)Cooperate since $6,500/1.025)> PV_{Benefits of cheating}.
• C)Cheat since PV_{Benefits of cheating} > $2,820.
• D)Cheat since PV_{Benefits of cheating} < $5,641.

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Definitions:

Flexible Budget

A budget that adjusts or flexes with changes in volume or activity levels, often used in variance analysis.

Variable Costs

Charges that adjust in line with the scale of production or sales figures.

Variable Overhead Efficiency Variances

The difference between the actual variable overhead incurred and the standard cost of variable overhead that should have been incurred based on efficient operations.

Fixed Overhead Volume Variances

The difference between the budgeted and actual fixed overhead costs, attributed to changes in production volume.