CHAPTER 23 PERFORMANCE MEASUREMENT, COMPENSATION, AND MULTINATIONAL CONSIDERATIONS TRUE/FALSE 1.

Many common performance measures, such as customer satisfaction, rely on internal financial accounting information. Difficulty: 1 Objective: 1

2. Some companies present financial and nonfinancial performance measures f or various organization units in a single report called the "balanced scorecard. " Difficulty: 1 Objective: 1

3. A major weakness of comparing two companies using only operating incomes as the basis of comparison is this method ignores differences in the size of th e investment required to earn the operating income. Difficulty: 4. n. 1 Objective: 3

Return on investment is also called the accrual accounting rate of retur Difficulty: 1 Objective: 3

5.

Investment turnover is calculated by dividing investments by revenues. Difficulty: 1 Objective: 3

6. The three alternatives for increasing return on investment include incre asing assets such as receivables, increasing revenues, and decreasing costs. (In all cases assume that all other items stay the same.) Difficulty: 2 Objective: 3

7. Return on investment is the most popular performance measure when measur ing performance in an investment center. Difficulty: 1 Objective: 3

8. To evaluate overall aggregate performance, return on investment and resi dual income measures are more appropriate than return on sales. Difficulty: 2 Objective: 3,4

9. Imputed costs are costs recognized in particular situations that are not usually recognized by accrual accounting procedures. Difficulty: 2 Objective: 4

10. The objective of maximizing return on investment may induce managers of highly profitable divisions to reject projects that from the viewpoint of the ov erall organization should be accepted. Difficulty: 11. 2 Objective: 4

Goal congruence is more likely to be promoted by using return on investm

ent rather than residual income as a measure of a subunit's managerial performan ce. Difficulty: 2 Objective: 4

12. Residual income calculations are similar to EVA calculations because in e ach calculation there is a charge for the divisions invested capital which is ded ucted from a measure of that divisions profit. Difficulty: 2 Objectives: 4,5

13. Economic value added, unlike residual income, charges managers for the c osts of their investments in long-term assets and working capital. Difficulty: 2 Objective: 5

14. Companies that adopt the Economic Value Added concept define investment as total assets employed minus current liabilities. Difficulty: 2 Objective: 5

15. In an Economic Added Value calculation, the corporate charge for a divis ions investment is based entirely on the after-tax interest rate on the firms debt . Difficulty: 2 Objective: 5

16. In an Economic Value Added calculation, the measure of the invested capi tal for a division would be that divisions assets minus that divisions liabilities . Difficulty: 2 Objective: 5

17. In an Economic Value Added calculation, the appropriate measure of a divisions profit would be that divisions after tax operating income. Difficulty: 2 Objective: 5

18. Current cost return on investment is a better measure of the current eco nomic returns from an investment than historical cost return on investment. Difficulty: 2 Objective: 6

19. A firm will see a difference in the return on investment amount dependin g if they use historical cost or current cost valuation methods for the assets. Difficulty: 2 Objective: 6

20. Comparing the performance of divisions of a multinational company operat ing in different countries is difficult due to the differences in economic, lega l, political, social, and cultural environments. Difficulty: 1 Objective: 7

21. One way to achieve greater comparability of historical cost-based ROIs f or a company s foreign division is to restate performance in dollars. Difficulty: 22.

An important consideration in designing compensation arrangements is the

Objective:

tradeoff between creating incentives and imposing risks. Difficulty: 1 Objective: 8

23. Moral hazard describes contexts in which an employee prefers to exert le ss effort than the effort that the owner wants because the employee s effort can not be accurately monitored and enforced. Difficulty: 24. 1 Objective: 8

Another term for benchmarking is a relative performance evaluation. Difficulty: 1 Objective: 8

25. Evaluating an executive s performance using the annual return on investm ent would sharpen an executive s long-run focus. Difficulty: 2

Objective:

26. Managers only employ one task as a part of their job, and thus evaluatio n of how well they do is simple to accomplish. Difficulty: 2 Objective: 8

27. Examples of "cooking the books" are understated assets and overstated li abilities. Difficulty: 1 Objective: 9

28. Residual income is a better evaluation method than return on investment because it has a lower required rate of return for the company projects than ret urn on investment does. Difficulty: 1 Objective: 9

29. An interactive control system is a formal information system that manage rs use to focus organization attention and learning on key strategic issues. Difficulty: 2 Objective: 9

30. Boundary systems describe standards of behavior and codes of conduct exp ected of all employees, especially actions that are off-limits. Difficulty: 2 Objective: 9

31. The four levers of control are operating profit before taxes, return on invest ment, residual income, and economic value added. Difficulty: MULTIPLE CHOICE 32. A report that measures financial and nonfinancial performance measures f or various organization units in a single report is called a(n): a. balanced scorecard b. financial report scorecard c. imbalanced scorecard d. unbalanced scorecard Difficulty: 1 Objective: 1 2 Objective: 9

33.

Customer-satisfaction measures are an example of the: a. goal-congruence approach b. balanced scorecard approach c. financial report scorecard approach d. investment success approach Difficulty: 1 Objective: 1

34.

An example of a performance measure with a long-run time horizon is: a. direct materials efficiency variances b. overhead spending variances c. number of new patents developed d. All of these answers are correct Difficulty: 2 Objective: 1

35. Does operating income best measure a subunit s financial performance? Th is question is considered part of which step in designing an accounting-based pe rformance measure? a. Choose performance measures that align with top management s fin ancial goals. b. Choose the time horizon of each performance measure. c. Choose a definition for each performance measure. d. Choose a measurement alternative for each performance measure. Difficulty: 2 Objective: 2

36. Should assets be defined as total assets or net assets? This question is considered part of which step in designing an accounting-based performance meas ure? a. Choose performance measures that align with top management s fin ancial goals. b. Choose the time horizon of each performance measure. c. Choose a definition for each performance measure. d. Choose a measurement alternative for each performance measure. Difficulty: 2 Objective: 2

37. Should assets be measured at historical cost or current cost? This quest ion is considered part of which step in designing an accounting-based performanc e measure? a. Choose performance measures that align with top management s fin ancial goals. b. Choose the time horizon of each performance measure. c. Choose a definition for each performance measure. d. Choose a measurement alternative for each performance measure. Difficulty: 2 Objective: 2

38. Which of the following statements about designing an accounting-based pe rformance measure is FALSE? a. The steps may be followed in a random order. b. The issues considered in each step are independent. c. Management s beliefs are present during the analyses. d. Behavioral criteria are important when evaluating the steps.

Difficulty: 39.

Objective:

Managers usually use the term return on investment to evaluate: a. the performance of a subdivision b. a potential project c. the performance of a subunit d. Both a and c are correct. Difficulty: 2 Objective: 3

40. The return on investment is usually considered the most popular approach to incorporating the investment base into a performance measure because: a. it blends all the ingredients of profitability into a single per centage b. once determined, there is no need to use it with other measures of performance c. it is similar to the company s price earnings ratio because a co rporation s return on investment appears every day in The Wall Street Journal d. Both a and c are correct. Difficulty: 41. Return a. b. c. d. 2 Objective:

on investment can be increased by: increasing operating assets decreasing operating assets decreasing revenues Both b and c are correct. 2 Objective: 3

Difficulty: 42. During $50,000. What %? a. b. c. d.

the past twelve months, the Aaron Corporation had a net income of is the amount of the investment if the return on investment is 20 $100,000 $200,000 $250,000 $500,000 2 Objective: 3

Difficulty:

43. During the past twelve months, the Zenith Corporation had a net income o f $39,200. What is the return on investment if the amount of the investment is $ 280,000? a. 10% b. 12% c. 14% d. 16% Difficulty: 44. 1 Objective: 3

The Alpha Beta Corporation had the following information for 20X5: Revenue $ 900,000 Operating expenses 670,000 Total assets 1,150,000 What is the return on investment? a. 10% b. 20% c. 25%

d.

78.2% 2 Objective: 3

Difficulty: 45. s:

Wacker Company has two regional offices. The data for each are as follow Maryland New York Revenues $ 580,000 $ 596,000 Operating assets 4,800,000 9,000,000 Net operating income 2,016,000 2,400,000 What is the Maryland Division s return on investment? a. 0.42 b. 0.54 c. 0.96 d. 4.12 Difficulty: 1 Objective: 3

46. ws:

Thacker Company has two regional offices. The data for each are as follo Maryland New York Revenues $ 580,000 $ 596,000 Operating assets 4,800,000 9,000,000 Net operating income 2,016,000 4,860,000 a. b. c. d. What is the return on investment for the New York Division? 0.42 0.54 0.96 4.12 1 Objective: 3

Difficulty:

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 47 THROUGH 49: The Cybertronics Corporation reported the following information for its Cyclotro n Division: Revenues $1,000,000 Operating costs 600,000 Taxable income 200,000 Operating assets 500,000 Income is defined as operating income. 47. What is the Cyclotron Division s investment turnover ratio? a. 2.00 b. 3.33 c. 2.50 d. 0.80 Difficulty: 48. 2 Objective: 3

What is the Cyclotron Division s return on sales? a. 0.20 b. 0.40 c. 0.50 d. 0.60

Difficulty: 49.

Objective:

What is the Cyclotron Division s return on investment? a. 0.2 b. 0.4 c. 0.5 d. 0.8 Difficulty: 2 Objective: 3

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 50 THROUGH 54: The top management at Munchie Company, a manufacturer of computer games, is atte mpting to recover from a flood that destroyed some of their accounting records. The main computer system was also severely damaged. The following information wa s salvaged: Alpha Division Sales $2,500,000 Net operating income Operating assets Return on investment Return on sales (e) Investment turnover 50. Beta Division Gamma Division (a) $1,150,000 $1,500,000 $650,000 $ (b) (c) $ 766,667 0.25 0.15 (d) 0.10 0.5 (f) (g) 1.5

What were the sales for the Beta Division? a. $4,333,333 b. $5,952,380 c. $6,500,000 d. $7,151,800 Difficulty: 2 Objective: 3

51. n?

What is the value of the operating assets belonging to the Alpha Divisio a. b. c. d. $4,333,333 $6,000,000 $6,500,000 $7,151,800 2 Objective: 3

Difficulty: 52. ?

What is the value of the operating assets belonging to the Beta Division a. b. c. d. $4,333,333 $5,952,380 $6,500,000 $7,151,800 2 Objective: 3

Difficulty: 53.

What is the Gamma Division s return on investment? a. 0.25 b. 0.42 c. 0.60 d. 0.75 Difficulty: 2 Objective: 3

54.

What is the Alpha Division s return on sales?

575,000

a. b. c. d.

0.25 0.42 0.60 0.75 2 Objective: 3

Difficulty:

55. Costs recognized in particular situations that are not recognized by acc rual accounting procedures are: a. opportunity costs b. imputed costs c. cash accounting costs d. None of these answers is correct. Difficulty: 56. 1 Objective: 4

A problem with using residual income is that a corporation with a: a. high investment turnover ratio always has a higher residual inco me than a corporation with a smaller investment turnover ratio. b. high return on sales always has a higher residual income than a corporation with a smaller return on sales. c. larger dollar amount of assets is likely to have a higher residu al income than a corporation with a smaller dollar amount of assets. d. None of these answers is correct. Difficulty: 57. 2 Objective: 4

A company which favors the residual income approach wants managers to: a. concentrate on maximizing an absolute amount of dollars b. concentrate on maximizing a percentage return c. maximize the investment turnover ratio d. maximize return on sales Difficulty: 2 Objective: 4

58. Using residual income as a measure of performance rather than return on investment promotes goal congruence because residual income: a. places importance on the reduction of underperforming assets b. calculates a percentage return rather than an absolute return c. concentrates on maximizing an absolute amount of dollars d. concentrates on maximizing the return on sales Difficulty: 2 Objective: 4

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 59 THROUGH 63: The Bandage Medical Supply Company has two divisions that operate independently of one another. The financial data for the year 20X5 reported the following resu lts: North South Sales $3,000,000 $2,500,000 Operating income 750,000 550,000 Taxable income 650,000 375,000 Investment 6,000,000 5,000,000 The company s desired rate of return is 10%. Income is defined as operat ing income. 59. What are the respective return-on-investment ratios for the North and So uth Divisions?

a. b. c. d.

0.110 0.108 0.125 0.050

and and and and 2

0.125 0.075 0.110 0.150 Objective: 3

Difficulty: 60.

Which of the following is the correct formula for return on sales? a. Income / Investment b. Investment / Income c. Income / Revenue d. Revenue / Investment Difficulty: 61. a. b. c. d. 1 Objective: 3

Another name for return on investment is the: net present value accounting rate of return residual income internal rate of return 1 Objective: 3

Difficulty: 62. ns?

What are the respective residual incomes for the North and South Divisio a. b. c. d. $30,000 and $50,000 $150,000 and $30,000 $150,000 and $50,000 $50,000 and a negative $150,000 2 Objective: 4

Difficulty:

63. Which division has the best return on investment and which division has the best residual income figure, respectively? a. North, North b. South, South c. North, South d. South, North Difficulty: 2 Objective: 4

64. After-tax operating income minus the after-tax weighted-average cost of capital multiplied by total assets minus current liabilities equals: a. return on investment b. residual income c. economic value added d. weighted-average cost of capital Difficulty: 1 Objective: 5

65. The after-tax average cost of all the long-term funds used by a corporat ion equals: a. economic value added b. return on investment c. return on equity d. weighted-average cost of capital Difficulty: 66. 1 Objective: 5

A negative feature of defining investment by excluding the portion of to

tal assets employed that are financed by short-term creditors is that: a. current liabilities are sometimes difficult to define b. short-term debt is always more expensive to finance than long-te rm debt c. this method encourages managers to use an excessive amount of sh ort-term debt d. this method encourages managers to use an excessive amount of long-term debt Difficulty: 2 Objective: 5

67. Springfield Corporation, whose tax rate is 40%, has two sources of funds : long-term debt with a market value of $8,000,000 and an interest rate of 8%, a nd equity capital with a market value of $12,000,000 and a cost of equity of 12% . What is Springfields weighted average cost of capital (WACC)? a. .0480 b. .0800 c. .0912 d. .1000 Difficulty: 2 Objective: 5

68. Springfield Corporation, whose tax rate is 40%, has two sources of funds : long-term debt with a market value of $8,000,000 and an interest rate of 8%, a nd equity capital with a market value of $12,000,000 and a cost of equity of 12% . Springfield has two operating divisions, the Blue division and the Gold divis ion, with the following financial measures for the current year: Total Assets Current Liabilities Operating Income Blue Div. $9,500,000 $2,800,000 $1,055,000 Gold Div. $11,000,000 $2,200,000 $1,200,000 What is Economic Value Added (EVA) for the Blue Division? a. $233,400 b. $21,960 c. $188,600 d. $433,960 Difficulty: 3 Objective: 5

69. Springfield Corporation, whose tax rate is 40%, has two sources of funds : long-term debt with a market value of $8,000,000 and an interest rate of 8%, a nd equity capital with a market value of $12,000,000 and a cost of equity of 12% . Springfields after-tax cost of debt is ______. a. b. c. d. .0320 .0480 .0800 .0912 2 Objective: 5

Difficulty:

70. Springfield Corporation, whose tax rate is 40%, has two sources of funds : long-term debt with a market value of $8,000,000 and an interest rate of 8%, a nd equity capital with a market value of $12,000,000 and a cost of equity of 12% . Springfield has two operating divisions, the Blue division and the Gold divis ion, with the following financial measures for the current year: Total Assets Current Liabilities Operating Income

Blue Div. Gold Div.

$9,500,000 $11,000,000

$2,800,000 $2,200,000

$1,055,000 $1,200,000

Calculate EVA for the Gold Division. a. $283,200 b. $82,560 c. $196,800 d. $397,440 Difficulty: 3 Objective: 5

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 71 THROUGH 73: Waldorf Company has two sources of funds: long-term debt with a market and book value of $10 million issued at an interest rate of 12%, and equity capital that has a market value of $8 million (book value of $4 million). Waldorf Company has profit centers in the following locations with the following operating incomes, total assets, and current liabilities. The cost of equity capital is 12%, while the tax rate is 25%. Operating Income Assets Current Liabilities St. Louis $ 960,000 $ 4,000,000 $ 200,000 Cedar Rapids $1,200,000 $ 8,000,000 $ 600,000 Wichita $2,040,000 $12,000,000 $1,200,000 71. What is the EVA for St. Louis? a. $255,740 b. $327,460 c. $392,540 d. $720,000 Difficulty: 72. 3 Objective: 5

What is the EVA for Cedar Rapids? a. $135,580 b. $220,000 c. $234,000 d. $305,000 Difficulty: 3 Objective: 5

73.

What is the EVA for Wichita? a. $450,000 b. $1,530,000 c. $414,360 d. $1,115,640 Difficulty: 3 Objective: 5

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 74 THROUGH 76: Ruth Cleaning Products manufactures home cleaning products. The company has two divisions, Bleach and Cleanser. Because of different accounting methods and infl ation rates, the company is considering multiple evaluation measures. The follow ing information is provided for 20X5: ASSETS INCOME Book value Current value Book value Current value Bleach $225,000 $300,000 $150,000 $155,000 Cleanser $450,000 $250,000 $100,000 $105,000

The company is currently using a 15% required rate of return. 74. What are Bleach s and Cleanser s return on investment based on book valu es, respectively? a. 0.22; 0.67 b. 0.42; 0.52 c. 0.52; 0.42 d. 0.67; 0.22 Difficulty: 2 Objective: 6

75. What are Bleach s and Cleanser s return on investment based on current v alues, respectively? a. 0.22; 0.67 b. 0.42; 0.52 c. 0.52; 0.42 d. 0.67; 0.22 Difficulty: 2 Objective: 6

76. What are Bleach s and Cleanser s residual incomes based on book values, respectively? a. $116,250; $32,500 b. $110,000; $67,500 c. $67,500; $110,000 d. $37,500; $116,250 Difficulty: 2 Objective: 6

77. The cost today of purchasing an asset identical to the one currently hel d is called a(n): a. actual cost b. current cost c. dual cost d. fixed cost Difficulty: 2 Objective: 6

78. If a company is a multinational company with operations in several diffe rent countries, one way to achieve comparability of historical-cost based ROIs f or facilities in different countries is to: a. restate the results of operations using the cash basis method of accounting b. use GAAP for all reporting and calculations c. restate the results of all operations in dollars d. All of these answers are correct. Difficulty: 79. 2 Objective: 7

Which of the following statements is true? a. The economic, legal, political, social, and cultural environment s differ across countries. b. Governments in some countries may impose controls and limit sell ing prices of a company s products. c. Because of advances in telecommunications and transportation, th e availability of materials and skilled labor does not differ significantly acro ss countries. d. Both (a) and (b) are correct.

Difficulty:

Objective:

80. ___ and ___ would be uncontrollable factors that a firm would need to co nsider when evaluating the return on investment of an international division. a. b. c. d. Managers experience, currency stability Managers compensation, political climate Required rate of return, legal requirements Custom duties, cultural environment 2 Objective: 7

Difficulty: 81.

In performance evaluations: a. the performance of the division prior to the manager assuming co ntrol should be considered b. economic conditions for the specific industry should not be cons idered c. to have an effective and fair evaluation, a manager should be ev aluated over several time periods d. Both a and c are correct. Difficulty: 2 Objective: 8

82. A problem with rewarding managers only on the basis of residual income i s that: a. residual income is difficult to measure b. on occasion the items in the residual income calculation are not quantifiable c. residual income can depend on items over which the manager has l ittle control d. All of these answers are correct. Difficulty: 2 Objective: 8

83. _________ describes contexts in which an employee prefers to exert less effort than the effort that the owner wants because the employee s effort cannot be accurately monitored and enforced. a. Goal congruence b. Moral hazard c. Management compensation d. Incentive compensation Difficulty: 84. 1 Objective: 8

Tying performance measures more closely to a manager s efforts: a. encourages the use of nonfinancial measures b. results in a strict use of financial ratios c. results in the salary component of compensation dominating the t otal compensation package d. Both a and c are correct. Difficulty: 85. 2 Objective: 8

Relative performance evaluation: a. is called benchmarking b. filters out the effect of common noncontrollable factors c. results in managers having no incentive to help one another d. All of these answers are correct. Difficulty: 2 Objective: 8

86.

Team incentives encourage cooperation by: a. forcing people to work together on difficult tasks b. improving morale c. letting individuals help one another as they strive toward a com mon goal d. rewarding all teams the same amount Difficulty: 1 Objective: 8

87. Many manufacturing, marketing, and design problems require employees wit h multiple skills; therefore, teams are used and the members have the added enco uragement of: a. individual incentives b. management incentives c. morale incentives d. team incentives Difficulty: 1 Objective: 8

88. Designers of executive compensation plans emphasize which of the followi ng factors? a. achievement of organizational goals b. administrative ease c. the probability that the executives affected by the plan will pe rceive the plan as fair d. All of these answers are correct. Difficulty: 2 Objective: 8

89. The situation in which an employee prefers to exert less effort compared with the effort desired by the owner because the employees effort cannot accurat ely be monitored and enforced is known as a(n): a. incentive b. moral hazard c. objective d. imputed cost Difficulty: 1 Objective: 8

90. Which of the following is a difference between a diagnostic control syst em and an interactive control system: a. A diagnostic control system focuses on meeting expectations, whi le an interactive control system focuses on standards of ethical behavior. b. A diagnostic control system focuses on standards of ethical beha vior while an interactive control system focus on meeting expectations. c. A diagnostic control system focuses on meeting expectations, whi le an interactive control system focuses on organizational attention and learnin g on key strategic issues. d. A diagnostic control system focuses on organizational attention and learning on key strategic issues, while an interactive control system focuse s on meeting expectations. Difficulty: 2 Objective: 9

91. A part of a control system that focuses on meeting expectations is known as a(n): a. diagnostic control system b. boundary system

c. d.

belief system interactive control system 2 Objective: 9

Difficulty:

92. A part of a control system that describes standards of behavior and code s of conduct expected of all employees, especially actions that are off-limits, is known as a(n): a. diagnostic control system b. boundary system c. belief system d. interactive control system Difficulty: 93. A part re values of a a. b. c. d. 2 Objective: 9

of a control system that articulates the mission, purpose, and co company is known as a(n): diagnostic control system boundary system belief system interactive control system 2 Objective: 9

Difficulty:

94. A part of a control system that attempts to focus an organizations attent ion and learning on key strategic issues is known as a(n): a. diagnostic control system b. boundary system c. belief system d. interactive control system Difficulty: 2 Objective: 9

95. Levers of control, in addition to a diagnostic control system, are needed in an organization because: a. diagnostic controls have been found to lead to poor financial pe rformance b. diagnostic controls have no place in a Balanced Scorecard system c. pressure to perform on diagnostic controls may lead to unethical behavior d. they are mandated by the Financial Accounting Standards Board Difficulty: EXERCISES AND PROBLEMS 96. Assume you are evaluating a manufacturing company. Match the various org anizational activities and concepts with the performance measures listed. Some i tems may have more than one match. Activities: 1. Change in revenues 2. Cycle time 3. Economic order quantity 4. Manufacturing defects 5. Market share 6. New products 7. On-time delivery 8. Operating income 9. Product reliability 3 Objective: 9

10.

Time-to-market

Performance measure: _______________ a. _______________ b. _______________ c. _______________ d. Difficulty: 2 Profitability Customer satisfaction Innovation Efficiency, quality, and time Objective: 1

97. Designing an accounting based performance measure requires six steps. Li st each step. For three of the steps, describe a question that must be resolved as part of the implementation process. Difficulty: 2 Objective: 2

98. Museum Corporation uses the investment center concept for the museums th at it manages. Select operating data for three of its museums for 20X5 are as fo llows: St. Louis Revenue $600,000 Operating assets Net operating income Required: a. b. c. rs? Dallas Miami $750,000 $900,000 300,000 250,000 350,000 51,000 56,000 59,000

Compute the return on investment for each division. Which museum manager is doing best based only on ROI? Why? What other factors should be included when evaluating the manage 2 Objective: 3

Difficulty:

99. Kase Tractor Company allows its divisions to operate as autonomous units . The operating data for 20X5 follow: Plows Tractors Combines Revenues $2,250,000 $500,000 $4,800,000 Accounts receivable 800,000 152,500 1,435,000 Operating assets 1,000,000 400,000 1,750,000 Net operating income 220,000 60,000 480,000 Taxable income 165,000 90,000 385,000 Required: a. b. c. d. e. rs? Compute the investment turnover for each division. Compute the return on sales for each division Compute the return on investment for each division. Which division manager is doing best? Why? What other factors should be included when evaluating the manage

For parts (b) and (c) income is defined as operating income.

Difficulty: 100.

Objective:

Provide the missing data for the following situations: Blue Division $400,000 $1,600,000 ? 1.5 3 $288,000

Red Division White Division Sales $? $10,000,000 $? Net operating income $200,000 Operating assets $? $? Return on investment 0.16 0.10 Return on sales 0.04 ? 0.12 Investment turnover ? ? Difficulty: 3

Objective:

101. Hargrave Products has three divisions, which operate autonomously. Their results for 20X5 were as follows: East West International Sales $30,000,000 $40,000,000 $50,000,000 Cost of goods sold 15,000,000 25,000,000 37,000,000 Operating income 4,500,000 4,750,000 5,000,000 Investment base 30,000,000 30,500,000 31,000,000 The company s desired rate of return is 15%. Compute each division s ROI. Round to three decimal places. Compute each division s residual income. 2 Objectives: 3, 4

Difficulty:

102. Batman Abstract Company has three divisions that operate autonomously. T heir results for 20X5 are as follows: Riddler Joker Penguin Sales $5,000,000 $7,000,000 $10,000,000 Contribution margin 1,440,000 1,700,000 3,500,000 Operating income 1,000,000 1,750,000 2,520,000 Investment base 9,000,000 10,000,000 14,000,000 The company s desired rate of return is 20%. Compute each division s ROI. Compute each division s residual income. Rank each division by both ROI and residual income. Which division had the best performance in 20X5? Why? 3 Objectives: 3, 4

Difficulty:

103. The Coffee Division of American Products is planning the 20X5 operating budget. Average operating assets of $1,500,000 will be used during the year and unit selling prices are expected to average $100 each. Variable costs of the div ision are budgeted at $400,000, while fixed costs are set at $250,000. The compa ny s required rate of return is 18%. Required: a. b.

Compute the sales volume necessary to achieve a 20% ROI. The division manager receives a bonus of 50% of residual income.

Required: a. b. c. d.

Required: a. b.

What is his anticipated bonus for 20X5, assuming he achieves the 20% ROI from p art (a)? Difficulty: 3 Objectives: 3, 8

104. LaserLife Printer Cartridge Company is a decentralized organization with several autonomous divisions. The division managers are evaluated, in part, on the basis of the change in their return on invested assets. Operating results fo r the Packer Division for 20X5 are budgeted as follows: Sales $5,000,000 Less variable costs 2,500,000 Contribution margin 2,500,000 Less fixed expenses 1,800,000 Net operating income $

700,000

Operating assets for the division are currently $3,600,000. For 20X5, th e division can add a new product line for an investment of $600,000. The new pro duct line will generate sales of $1,600,000 and will incur fixed expenses of $60 0,000 annually. Variable costs of the new product will average 60% of the sellin g price. Required: a. What is the effect on ROI of accepting the new product line? b. If the company s required rate of return is 6% and residual inco me is used to evaluate managers, would this encourage the division to accept the new product line? Explain and show computations. Difficulty: 2

105. Capital Investments has three divisions. Each division s required rate o f return is 15%. Planned operating results for 20X5 are as follows: Division Operating income A $15,000,000 $100,000,000 B $25,000,000 $125,000,000 C $11,000,000 $ 50,000,000 Investment

The company is planning an expansion, which will require each division t o increase its investments by $25,000,000 and its income by $4,500,000. Required: a. Compute the current ROI for each division. b. c. incomes. Compute the current residual income for each division. Rank the divisions according to their current ROIs and residual

d. Determine the effects after adding the new project to each divis ion s ROI and residual income. e. Assuming the managers are evaluated on either ROI or residual in come, which divisions are pleased with the expansion and which ones are unhappy? Difficulty: CRITICAL THINKING 3 Objectives: 3, 4, 8

Objectives:

3, 4, 8

106. The executive vice president of Wicker Pen Company wants to establish an accounting-based performance measurement system for the company s new plant. Th e company has an accounting information system sufficient to support a fairly so phisticated performance measurement system. The new plant is going to be conside red an investment center since its products will be markedly different from othe rs the company currently sells. The new plant will have no internal dealings wit h other plants within the company. Required: What are some of the key steps that should be undertaken in the establis hment of an accounting-based performance measurement system? Difficulty: 2 Objective: 2

107. Companies are increasingly using nonfinancial measures to evaluate perfo rmance. Why? Since these numbers do not come from the companys financial records, why are they used? Difficulty: 3 Objective: 1

108. Bob s Cellular Phone Company uses ROI to measure divisional performance. Annual ROI calculations for each division have traditionally employed the endin g amount of invested capital along with annual operating income and net revenue. The Dupont method is generally used. The company s Phone Accessories Division h ad the following results for the last two years: 20X5 ROI = ($2,000,000/$20,000,000) x ($20,000,000/$10,000,000) = 0.20 20X6 ROI = ($2,400,000/$25,000,000) x ($25,000,000/$15,000,000) = 0.16 Corporate management was disappointed in the performance of the division for 20X6, since it had made an additional investment in the division that was b udgeted for a 23% ROI. Required: a. Discuss some factors that may have contributed to the decrease i n ROI for 20X6. b. Would there have been any substantial difference if average capi tal had been used? Difficulty: 3 Objective: 3

109. The economic value added concept has attracted considerable attention in recent years. Explain the attractiveness of this number as a measure of perform ance. Difficulty: 3 Objective: 5

110. R&D Storage is a small, but diversified, moving and storage company. In recent years, its corporate income has declined to unacceptable levels. To chang e the direction of the company, the board of directors hired a new chief executi ve officer. She is currently considering three alternative ways to reward divisi on managers for performance. They are: 1. Give each manager a competitive salary with no bonus for perform ance.

2. Give each manager a base salary with the largest portion being a bonus based on performance, ROI being the yardstick. 3. Give each manager a base salary with a bonus based on comparativ e performance with the other divisions. Required: Evaluate each of the ideas, giving strengths and weaknesses. Difficulty: 2 Objectives: 8

111. Briefly explain each of the four levels of control. Why does a company need to implement more than a diagnostic control system? Difficulty: 2 Objectives: 9