Question 1

Evaluating an executive's performance using the annual return on investment would sharpen an executive's long-run focus.

Accepted Answer

Evaluating an executive's performance based solely on annual return on investment tends to encourage a focus on short-term gains rather than long-term strategic planning and investments.

Question 2

Team incentives encourage cooperation by:

Accepted Answer

Team incentives encourage cooperation by allowing individuals to help one another as they strive towards a common goal. Rather than creating a competitive environment, team incentives encourage collaboration and mutual support among team members. By working together, team members can pool their skills and resources, achieving results that would be impossible for any individual to accomplish alone. This leads to higher levels of productivity, morale, and performance, as well as greater creativity and innovation.

Question 3

Many manufacturing,marketing,and design problems require employees with multiple skills;therefore,teams are used and the members have the added encouragement of:

Accepted Answer

Teams are used specifically because they require multiple skills and expertise, and team incentives are designed to help motivate individuals towards a common goal. Morale incentives, management incentives, and individual incentives may also be used in conjunction with team incentives, but they are not as directly related to the benefits of teamwork.

Question 4

LaserLife Printer Cartridge Company is a decentralised organisation 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 for the Packer Division for 2019 are budgeted as follows:
 $$\begin{array} { | l | r | } 
\hline \text { Sales } & \$ 5000000 \
\hline \text { Less variable costs } & \underline { 2500000 } \
\hline \text { Contribution margin } & 250000 \
\hline \text { Less fixed expenses } & \underline { 1800000 } \
\hline \text { Net operating profit } & \$ 100000 \
\hline
\end{array}$$ 
Operating assets for the division are currently $3 600 000.For 2019,the division can add a new product line for an investment of $600 000.The new product line will generate sales of $1 600 000 and will incur fixed expenses of $600 000 annually.Variable costs of the new product will average 60% of the selling 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 income is used to evaluate managers,would this encourage the division to accept the new product line? Explain and show computations.
_____________________________________________________________________________________________
_____________________________________________________________________________________________

Accepted Answer

The answer of LaserLife Printer Cartridge Company is a decentralised...

Question 5

Murray River Fisheries Company is a decentralised organisation 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 for the Greenwall Division for 2019 are budgeted as follows:
 $$\begin{array} { | l | r | } 
\hline \text { Sales } & \$ 10000000 \
\hline \text { Less variable costs } & \underline { 5000000 } \
\hline \text { Contribution margin } & 5000000 \
\hline \text { Less fixed expenses } & \underline { 3600000 } \
\hline \text { Net operating profit } & \$ 1400000 \
\hline
\end{array}$$ 
Operating assets for the division are currently $7 200 000.For 2019,the division can add a new product line for an investment of $1 200 000.The new product line will generate sales of $3 200 000 and will incur fixed expenses of $1 200 000 annually.Variable costs of the new product will average 60% of the selling 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 income is used to evaluate managers,would this encourage the division to accept the new product line? Explain and show computations.
_____________________________________________________________________________________________
____________________________________________________________________________________________

Accepted Answer

The answer of Murray River Fisheries Company is a decentralised...

Question 6

Canberra Asset Management has three divisions.Each division's required rate of return is 15%.Planned operating results for 2019 are as follows:
 $$\begin{array} { | c | r | r | } 
\hline \text { Division } & \text { Operating profit } &  { \text { Investment } } \
\hline \mathrm { A } & \$ 22500000 & \$ 175000000 \
\hline \mathrm { B } & \$ 37500000 & \$ 187500000 \
\hline \mathrm { C } & \$ 16500000 & \$ 75000000 \
\hline
\end{array}$$ 
The company is planning an expansion,which will require each division to increase its investments by
$37 500 000 and its profit by $6 750 000.
Required:
a.Calculate the current ROI for each division.
b.Calculate the current residual income for each division.
c.Rank the divisions according to their current ROIs and residual incomes.
d.Determine the effects after adding the new project to each division's ROI and residual income.
e.Assuming the managers are evaluated on either ROI or residual income,which divisions are pleased with the expansion and which ones are unhappy?
_____________________________________________________________________________________________
_____________________________________________________________________________________________

Accepted Answer

The answer of Canberra Asset Management has three divisions.Each division's...

Question 7

R&D Storage is a small,but diversified,moving and storage company.In recent years,its profit has declined to unacceptable levels.To change the direction of the company,the board of directors hired a new chief executive officer.She is currently considering three alternative ways to reward division managers for performance.They are:
1.Give each manager a competitive salary with no bonus for performance.
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 comparative performance with the other divisions.
Required:
Evaluate each of the ideas,giving strengths and weaknesses.
_____________________________________________________________________________________________
_____________________________________________________________________________________________

Accepted Answer

The answer of R&D Storage is a small,but diversified,moving and...

Question 8

The Coffee Division of New Zealand Products is planning the 2019 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 division are budgeted at $400 000,while fixed costs are set at $250 000.The company's required rate of return is 18%.
Required:
a.Compute the sales volume necessary to achieve a 20% ROI.
b.The division manager receives a bonus of 50% of residual income.What is his anticipated bonus for 2019,assuming he achieves the 20% ROI from part (a)?
_____________________________________________________________________________________________
_____________________________________________________________________________________________

Accepted Answer

The answer of The Coffee Division of New Zealand Products...

Question 9

Tying performance measures more closely to a manager's efforts:

Accepted Answer

Tying performance measures more closely to a manager's efforts normally requires the use of non-financial measures. This is because financial measures alone may not capture all aspects of a manager's performance, and non-financial measures can provide a more holistic view of performance. While financial ratios may be used as one of several performance measures, a strict use of financial ratios alone would not be sufficient to tie performance measures more closely to a manager's efforts. The statement regarding the salary component dominating the total compensation package is not directly related to tying performance measures to a manager's efforts.

Question 10

Another term for benchmarking is a 'relative performance evaluation'.

Accepted Answer

Benchmarking involves comparing one's own performance to that of others in the same industry or market, making it a type of relative performance evaluation.

Question 11

The situation in which an employee prefers to exert less effort compared with the effort desired by the owner because the employee's effort cannot accurately be monitored and enforced is known as a(n):

Accepted Answer

The situation described in the question is that of moral hazard. Moral hazard arises when one party (in this case, the employee) has an incentive to take risks or behave in a certain way because they do not bear the full consequences of their actions. In this case, because the owner cannot accurately monitor the employee's effort, the employee may prefer to exert less effort than desired. This is because the employee does not bear the full consequences of their lack of effort (e.g. lower productivity, lower profits for the owner), which is a classic example of moral hazard.

Question 12

________ 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.

Accepted Answer

Moral hazard refers to situations where one party's behavior is not fully observable or enforceable by the other party, leading to the risk of the unobservable party shirking or exerting less effort. In the context given, if the employee's effort cannot be accurately monitored and enforced by the owner, the employee may be more likely to engage in shirking behavior. The other choices do not directly relate to this situation.

Question 13

The only criticism of team-based compensation is that the incentives for individual employees to excel are diminished,harming overall performance.

Accepted Answer

Team-based compensation can also lead to issues such as free-riding, where some team members may contribute less but still benefit from the efforts of others, and difficulties in fairly assessing individual contributions within a team setting, among other potential criticisms.

Question 14

'Moral hazard' 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.

Accepted Answer

This is an accurate definition of moral hazard in the context of employer-employee relationships.

Question 15

Managers only employ one task as a part of their job,and thus evaluation of how well they do is simple to accomplish.

Accepted Answer

This statement is not true. Managers have multiple tasks as a part of their job, such as planning, organizing, controlling, and leading. Therefore, evaluating their performance is not a simple task.

Question 16

A problem with rewarding managers only on the basis of residual income is that:

Accepted Answer

Residual income can be influenced by factors outside a manager's control, such as economic conditions or changes in corporate policy, making it an imperfect measure of a manager's performance.

Question 17

In performance evaluations:

Accepted Answer

Choice A is correct because evaluating a manager's performance over several time periods provides a more accurate assessment of their overall performance, as opposed to just evaluating them based on one period.

Choice B is incorrect because economic conditions for the specific industry should be considered when evaluating a manager's performance since it can greatly impact their ability to meet certain goals and objectives.

Choice C is correct because it's important to consider the state of the division before the manager assumed control, as this can also impact their performance.

Overall, both choice A and C are correct, making D the best answer.

Question 18

Capital Investments has three divisions.Each division's required rate of return is 15%.Planned operating results for 2019 are as follows:
 $$\begin{array} { | c | c | c | } 
\hline \text { Division } & \text { Operating profit } & \text { Investment } \
\hline \mathrm { A } & \$ 15,000,000 & \$ 100,000,000 \
\hline \mathrm { B } & \$ 25,000,000 & \$ 125,000,000 \
\hline \mathrm { C } & \$ 11,000,000 & \$ 50,000,000 \
\hline
\end{array}$$ 
The company is planning an expansion,which will require each division to increase its investments by
$25 000 000 and its profit by $4 500 000.
Required:
a.Compute the current ROI for each division.
b.Compute the current residual income for each division.
c.Rank the divisions according to their current ROIs and residual incomes.
d.Determine the effects after adding the new project to each division's ROI and residual income.
e.Assuming the managers are evaluated on either ROI or residual income,which divisions are pleased with the expansion and which ones are unhappy?
_____________________________________________________________________________________________
_____________________________________________________________________________________________

Accepted Answer

The answer of Capital Investments has three divisions.Each division's required...

Question 19

The Frozen Foods Division of Northern Territory Products is planning the 2019 operating budget.Average operating assets of $4 500 000 will be used during the year and unit selling prices are expected to average $50 each.Variable costs of the division are budgeted at $1 200 000,while fixed costs are set at
$500 000.The company's required rate of return is 20%.
Required:
a.Calculate the sales volume necessary to achieve a 22% ROI.
b.The division manager receives a bonus of 50% of residual income.What is his anticipated bonus for 2019,assuming he achieves the 22% ROI from part (a)?
_____________________________________________________________________________________________
_____________________________________________________________________________________________

Accepted Answer

The answer of The Frozen Foods Division of Northern Territory...

Question 20

Designers of executive compensation plans emphasise which of the following factors?

Accepted Answer

Designers of executive compensation plans need to consider all of the above factors to ensure that the plan is effective in achieving the goals of the organisation, easy to administer, and perceived as fair by the executives affected by the plan. A plan that is not perceived as fair by executives may not motivate them to perform at their best, which defeats the purpose of having a compensation plan in the first place. Additionally, a plan that is too complicated or difficult to administer may lead to mistakes or errors in implementation, which can have undesirable consequences for both the organisation and its executives. Therefore, the best choice is D, as all of the factors mentioned are important to consider when designing an effective executive compensation plan.

Quiz 20: Performance Measurement, Compensation and Multinational Considerations