The inability to see all aspects of a situation may prevent accurate problem definition. This inability

may be caused by faulty perception. Faulty perception includes group pressure influencing which

problems are perceived or how the problems are defined.

Increasing the quality of the accounts rejected means that fewer sales will be made. The company is

therefore not trying to maximize its sales or increase its bad debt losses. The objective is to reduce

bad debt losses and thereby maximize profits.

A firm with high risk will have a higher debt-to-equity ratio than a low-risk firm, a lower interest

coverage, and a volatile return on equity. A higher debt-to-equity ratio poses a greater risk of

insolvency. Debt holders must be paid regardless of whether the firm is profitable. Low interest

coverage means that the margin of safety of earnings before interest and taxes is small. A volatile

return on equity signifies that earnings are unpredictable. Lack of predictability increases risk.

Subsidies for new firms lower entry barriers. Thus, new firms may enter the industry and intensify

competition. Government policy also may affect competition via regulations that encourages or

discourage substitutes or affect costs, that govem competitive behavior, or that limit growth.

Government also may be a buyer or supplier.

At this price, the supplying division is indifferent as to whether it sells internally or externally. Outlay

cost plus opportunity cost therefore represents a minimum acceptable price for a seller However, no

transfer price formula is appropriate in all circumstances.

Operating leverage is a measure of the degree to which fixed costs are used in the production

process. A company with a higher percentage of fixed costs (higher operating leverage) has greater

risk than one in the same industry that relies more heavily on variable costs. The DOL equals the

percentage change in net operating income divided by the percentage change in sales. Thus, profits

become more sensitive to changes in sales volume as the DOL increases.

The greater the standard deviation of the expected return, the riskier the investment. a large

standard deviation implies that the range of possible return is wide,i.e.,the probability distribution is

broadly dispersed.converely,the smaller the standard deviation, the tighter the probability

distribution and the lower the risk.

Interest-rate risk is the risk of fluctuations in the value of an asset due to changes in interest rates.

One component of interest-rate risk is price risk; for example, the value of bonds declines as interest

rates increase. Reinvestment-rate risk is another component of interest-rate risk. If interest rates

decline, lower returns will be available for reinvestment of interest and print pal payments received.

Budget formulation is a planning function; however, budgets are also useful control devices. Budget

provide a basis for control of performance through comparisons of actual with budgeted data. They

permit analysis of variations from plans and signal the need for corrective managerial action.