Question 1

Compare and contrast return on investment, residual income, and economic value added. Which method is best for evaluating investment centre managers? Explain your reasoning.

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Question 2

Following is information for the Krishnan Company's three business divisions:
Division A Division B Division C
Pretax operating income $800,000 $400,000 $600,000
Current assets 80,000 60,000 80,000
Long-term assets 3,200,000 2,600,000 1,600,000
Current liabilities 400,000 200,000 300,000
Krishnan's tax rate for the divisions is 30%, and its after-tax weighted-average cost of capital (WACC)for each segment is 12%. The WACC is also used as a required rate of return.
a)Determine the division with the highest ROI. Show your calculations.
b)Determine the division with the highest residual income. Show your calculations.
c)Determine the segment with the highest EVA. Show your calculations.
d)Compare and contrast these three performance measures and their influence on managers.
e)Why is it better to use multiple measures for evaluating manager performance rather than a single measure such as ROI or EVA?

Accepted Answer

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Question 3

Managers often make choices about the location of decision-making responsibility. What is the relationship between the type of knowledge that is important in the organization and the location of decision-making authority?

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Question 4

Why might some organizations use both ROI and EVA in their performance measures for bonus-based compensation?

Accepted Answer

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Question 5

(CMA)Responsibility accounting defines an operating centre that is responsible for revenue and costs as a(n):

Accepted Answer

Responsibility accounting is the allocation of revenues, costs, and profits to the individual managers or departments responsible for them. A profit centre is an operating unit accountable for both revenues and expenses and is responsible for generating profits. As such, it is the most appropriate choice for defining an operating centre responsible for revenue and costs. Revenue centres are only responsible for generating revenue, while divisions and investment centres have broader responsibilities beyond revenue and cost.

Question 6

Indicate whether each of the following is more descriptive of centralized (C)or decentralized (D)decision-making.
____ 1. Decision-makers may not fully understand organizational goals and strategies
____ 2. Decisions are more easily made for the benefit of the overall organization
____ 3. Decisions are made by individuals with the greatest knowledge
____ 4. Good for organizations with stable and less complex operations
____ 5. Lack of coordination among subunits may lead to duplication in efforts
____ 6. Although less monitoring of decisions is usually needed, more monitoring of employee effort is necessary.
____ 7. Managers are motivated more often through incentive contracting rather than by monitoring
____ 8. Poor quality decisions due to lack of information
____ 9. More timely decision-making
____ 10. Upper management can focus on organizational strategies

Accepted Answer

The answer of Indicate whether each of the following is...

Question 7

Clark and Lana are product managers at SML Corporation. They are considering two potential investments, data for which are estimated below:
Project A Project B
Operating income $ 600 $ 750
Adjusted after-tax operating income 500 700
Adjusted total assets 1,000 3,500
Average operating assets 1,200 4,000
Current liabilities 800 500
Revenue 1,000 1,200
SML's weighted average cost of capital, which also serves as its required rate of return, is 12%.
If Clark and Lana can invest in only one project, which should they choose? Why?

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Question 8

Horse Stables Inc. has operations in Edmonton and Calgary, Alberta. Each geographic location has the following responsibility centres: horse boarding, riding lessons, horse sales, and administrative support. The director at each location is responsible for decisions regarding investments in facilities, horses, and any other type of investments. In addition, the directors make operating decisions such as advertising, hiring, and evaluating personnel. Department heads for the responsibility centres are responsible for daily operating decisions.
Identify the type of responsibility centre for each of the following: the two geographic locations and each of the responsibility centres-horse boarding, riding lessons, horse sales, and administrative support. Explain your classifications.

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Question 9

Why should executive compensation in public companies be set by an independent compensation committee of the board of directors?

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Question 10

Centralized organizations may decide to decentralize their decision-making authority once they begin operations in foreign countries. Explain why this occurs.

Accepted Answer

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Question 11

Delta Division had the following results for the year just ended:
Sales $375,000
Variable costs 225,000
Fixed costs 120,000
Total operational assets 150,000
Delta is considering a new product line that would involve the following:
Sales $75,000
Variable costs 45,000
Fixed costs 23,250
Total operational assets 37,500
Delta's parent company, Omega, Inc., has a company-wide ROI of 14% and pays bonuses based on divisional ROI.
a)Determine the effect on Delta's ROI if it introduces the new product line. Would Delta's managers be encouraged to introduce the new product line?
b)Determine the effect on Omega's ROI if Delta introduces the new product line. Would the top managers of Omega want to introduce the new product line?
c)Assume a required rate of return of 10% on operational assets invested in each division. Determine the effect on Delta's residual income if it introduces the new product. Would Delta's managers be encouraged to introduce the new product line?

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Question 12

Use appropriate information from the list below to calculate the amounts indicated.
Operating income $ 50,000
Adjusted after-tax operating income 35,000
Adjusted total assets 80,000
Average operating assets 90,000
Current liabilities 15,000
Revenue 120,000
Weighted average cost of capital 10%
a)Calculate return on investment
b)Calculate residual income
c)Calculate economic value added

Accepted Answer

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Question 13

Two divisions of Interspatial Company report summary results as follows:
Pluto Mars
Sales $800,000 $900,000
Operating income $100,000 $150,000
Average investment $200,000 $400,000
a)Calculate the return on investment for each division and then break it down into the return on sales and investment turnover.
b)What is the residual income for each division if the required rate of return is 20%?

Accepted Answer

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Question 14

The manager in a cost centre is responsible for:

Accepted Answer

The manager in a cost centre is responsible for only the costs of production or services, not investments or revenues. The primary goal of a cost centre is to manage and control costs, hence the responsibility of the manager is limited to cost-related issues.

Question 15

Indicate whether each item listed below is most closely associated with: (A)return on investment, (B)residual income, or (C)economic value added. Each numbered item has only one correct answer.
____ 1. Adjustments incorporated in calculations are a matter of management judgment
____ 2. Components motivate managers to increase sales
____ 3. Discourages managers from investing in projects that may harm divisional results but may enhance overall organizational results
____ 4. Does not incorporate measurements of risk
____ 5. Does not penalize project investments with lower returns than current returns
____ 6. Easily compared with external benchmarks
____ 7. Incorporates weighted average cost of capital
____ 8. Larger subunits are more likely to report better results
____ 9. Measures the dollar amount of profits given a required rate of return
____ 10. Research and development costs are often capitalized in its calculation

Accepted Answer

The answer of Indicate whether each item listed below is...

Question 16

(CMA)The segment operating margin less imputed (estimated)interest on the assets used by the investment centre is known as:

Accepted Answer

Residual income is calculated by deducting the imputed (estimated) interest on the assets used by the investment center from the segment operating margin. It provides a measure of the actual amount of income earned by the investment center over and above the cost of the assets used to generate that income. Return on investment (ROI) is calculated by dividing the segment operating income by the average operating assets employed in the investment center, whereas return on assets (ROA) is calculated by dividing the net income by the total assets of the company. Operating Income is the income earned from the day-to-day operations of the investment center.

Question 17

Match between columns Premises: The Cruise Booking Department of All-Ways Travel manages group reservations of twenty passengers or more. Its costs are largely fixed and determined by the travel agency manager.
Potential Performance Measures
I.Budgets and variances
II.Inventory turnover
III.Number of new products or processes introduced
IV.Return on investment
V.Revenue per passenger
Responsibility Centre Types MND Corporation's Research and Development Department investigates new products and processes to increase organizational profits.
Potential Performance Measures
I.Budgets and variances
II.Inventory turnover
III.Number of new products or processes introduced
IV.Return on investment
V.Revenue per passenger
Responsibility Centre Types The Facilities Management Department of CPP Corporation handles office cleaning and grounds maintenance.
Potential Performance Measures
I.Budgets and variances
II.Inventory turnover
III.Number of new products or processes introduced
IV.Return on investment
V.Revenue per passenger
Responsibility Centre Types The Electronics Department of ESale.com, an Internet retail company, sells small electronics and sets its own product prices.
Potential Performance Measures
I.Budgets and variances
II.Inventory turnover
III.Number of new products or processes introduced
IV.Return on investment
V.Revenue per passenger
Responsibility Centre Types Franklin Toy Company's Irish Division manufactures toys and is responsible for developing new lines of toys and games, including toys that use new technologies.
Potential Performance Measures
I.Budgets and variances
II.Inventory turnover
III.Number of new products or processes introduced
IV.Return on investment
V.Revenue per passenger
Responsibility Centre Types

Accepted Answer

The Answer of Profit centre and Cost centre and Revenue is...

Quiz 16: Performance Evaluation and Compensation