Exam 23: Performance Measurement, Compensation, and Multinational Considerations

Answer the following questions using the information below: The Bandage Medical Supply Company has two divisions that operate independently of one another. The financial data for the year 2012 reported the following results: The company's desired rate of return is 10%. Income is defined as operating income. -What are the respective residual incomes for the North and South Divisions?

Goal congruence is more likely to be promoted by using return on investment rather than residual income as a measure of a subunit's managerial performance.

The "four levers" of control are diagnostic control systems, boundary systems, belief systems, and interactive control systems.

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):

One way to achieve greater comparability of historical cost-based ROIs for a company's foreign division is to restate performance in dollars.

Using net book value as an investment base is consistent with the amount of total assets shown in the conventional balance sheet.

Current cost return on investment is a better measure of the current economic returns from an investment than historical cost return on investment.

Answer the following questions using the information below: The top management at Groundsource Company, a manufacturer of lawn and garden equipment, is attempting to recover from a fire that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged: -What is the Tiller Division's investment turnover?

R&D Storage is a small, but diversified, moving and storage company. In recent years, its corporate income 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.

Consolidated Gas Supply Corporation uses the investment center concept for the gasoline stations that it manages in the city. Consolidated has a 15% required rate of return on investment in order for a branch station to be viable. Select operating data for three of its stations for 200X are as follows: Required: a. Compute the return on investment for each station. b. Which station manager is doing best based only on ROI? Why? c. Are any of the stations in danger of being closed due to lack of performance? d. What other factors should be included when evaluating the managers?

The three alternatives for increasing return on investment include increasing assets such as receivables, increasing revenues, and decreasing costs. (In all cases assume that all other items stay the same.)

Capital Investments has three divisions. Each division's required rate of return is 15%. Planned operating results for 20X5 are as follows: The company is planning an expansion, which will require each division to increase its investments by $25,000,000 and its income 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?

Comparing the performance of divisions of a multinational company operating in different countries is difficult due to the differences in economic, legal, political, social, and cultural environments.

Answer the following questions using the information below: Carriage Incorporated manufactures horse carriages. The company has two divisions, Wheels and Assembly. Because of different accounting methods and inflation rates, the company is considering multiple evaluation measures. The following information is provided for 2009: The company is currently using a 12% required rate of return. -What are Wheels's and Assembly's return on investment based on current values, respectively?

The residual income method is the most popular performance measure when measuring performance in an investment center.

Thacker Company has two regional offices. The data for each are as follows: What is the return on investment for the New Jersey Division?

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 for the Packer Division for 20X5 are budgeted as follows: Operating assets for the division are currently $3,600,000. For 20X5, 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.

Answer the following questions using the information below: The top management at Groundsource Company, a manufacturer of lawn and garden equipment, is attempting to recover from a fire that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged: -What is the value of the operating assets belonging to the Tractor Division?

Companies are increasingly using nonfinancial measures to evaluate performance. Why? Since these numbers do not come from the company's financial records, why are they used?

Companies that adopt the Economic Value Added concept define investment as total assets employed minus current liabilities.