Exam 24: Multinational Performance Measurement and Compensation

Broughton Industries Ltd. is a publicly traded company and is organized into divisions. The company currently has a stock option plan for its head office executives only and it now is considering establishing an incentive program for its divisional managers. The proposal is to create a bonus pool based on a predetermined percentage of corporate net income after taxes. Divisional managers will be eligible for money from the bonus pool based on achievement of divisional return on investment (ROI). The calculation of the divisional ROI will be based on divisional net income (including an allocation of head office charges) and investment is defined as total assets. Required: Evaluate the proposed incentive plan. What changes would you recommend, if any, to the proposal?

"Levers of control," in addition to a diagnostic control system, are needed in an organization because

A part of a control system that focuses on meeting expectations is known as a(n)

Answer the following question(s) using the information below: Carriage Ltd. manufactures baby 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 the year just ended: 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?

Use the information below to answer the following question(s). The top management at Munchie Company, a manufacturer of computer games, is attempting to recover from a flood, which destroyed some of its accounting records. The main computer system was also severely damaged. The following information was salvaged: -Costs recognized in particular situations that are not recognized by accrual accounting procedures are

Boundary systems describe standards of behaviour and codes of conduct expected of all employees, especially actions that are off-limits.

Answer the following question(s) using the information below: Coldbrook Company has two sources of funds: long-term debt with a market and book value of $15 million issued at an interest rate of 10%, and equity capital that has a market value of $9 million (book value of $5 million). Coldbrook Company has profit centres in the following locations with the following operating incomes, total assets, and current liabilities. The cost of equity capital is 15%, while the tax rate is 30%. -For the period just ended, Trident Ltd. reported profit of $22.6 million and invested capital of $250 million. Assuming an imputed interest rate of 8%, which of the following choices correctly denotes Trident's return on investment (ROI) and residual income respectively?

What disadvantage is there in using ROI and/or RI as performance measures?

Provide the missing data for the following situations:

A part of a control system that articulates the mission, purpose, and core values of a company is known as a(n)

Coptermagic Company supplies helicopters to corporate clients. Coptermagic has two sources of funds: long term debt with a market and book value of $32 million issued at an interest rate of 10%, and equity capital that has a market value of $18 million (book value of $8 million). The cost of equity capital for Coptermagic is 15%, and its tax rate is 30%. Coptermagic has profit centres in four divisions that operate autonomously. The company's results for the past year are as follows: Required: a. Compute Coptermagic's weighted average cost of capital. b. Compute each division's Economic Value Added. c. Rank the divisions by EVA.

Last year Reynolds Ltd. reported the following results: Required: a. Using the DuPont method, calculate the company's return on investment for the year just ended. b. Assuming the company's sales and assets remain the same as last year, by how much would the gross margin percentage have to increase to achieve a 20% return on investment? c. Assume the company sets a minimum required return of 13%, what would the residual income be?

Use the information below to answer the following question(s). Berger Publishing has two divisions which operate autonomously. Their results for the past year were as follows: The company's desired rate of return is 15%. -What are the respective return-on-investment ratios for the Toronto and Vancouver divisions?

The first step in designing accounting based performance measures is to choose performance measures that align with top management's financial goals.

The timing of feedback depends on the level of management that receives the information and on the complexity of the organization's information technology.

Return on investment is also called the accrual accounting rate of return.

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?

Use the information below to answer the following question(s). The following data are available for a foundry operation started as a new company four years ago when the construction cost index was 125: * = long-term assets at historical cost -What is the year 4 operating income using year-4 current cost amortization?

Many common performance measures rely on internal financial and accounting information.

Return on investment highlights the benefits that managers can obtain by reducing their investments in current or fixed assets.