Exam 22: Multinational Performance Measurement and Compensation

Use the information below to answer the following question(s). The top management at Groundsource Company,a manufacturer of lawn and garden equipment,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: -What is the Tractor Division's return on sales?

Which of the following performance measures is more likely to promote goal congruence?

The Coffee Division of Canadian Products is planning the operating budget for next year.Average total 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 volume necessary to achieve a 20% ROI. b.The division manager receives a bonus of 50% of the residual income.What is his anticipated bonus for next year assuming he achieves the targeted operating income in part a.and the required return is based on 18%?

There are three basic ingredients in profitability: investment,revenue,and debt.

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

Return on sales is calculated by dividing net income by revenues.

Miller Medical Services provided the following information for its operations in the Hospital Bed Division. What is the Hospital Bed's residual income?

Alpine Ltd.has two divisions.Division A manufactures components that can be sold in the external market place or transferred to Division B for further processing.The following data relate to Division A's component product. The capacity of the plant is 2,500 units per year. Division B has offered to purchase 350 units from Division A at a price of $1,600/unit,which is the market price of the component.The manager of Division A has refused this offer stating that it would only return a rate of 25.00%,when the divisional target return on sales is 28.00%.The Division A manager also states that additional fixed costs of $195,000 would be required to produce the 350 units. The corporate required rate of return is 18% of assets and the existing asset base in Division A is $2,500,000. Required: a.How many units must Division A sell in order to achieve its required ROR? What profit margin would be earned at this level of sales? b.Assume Division A currently sells 2,000 units to the external market and can accept Division B's offer without affecting its external sales.Evaluate the refusal of Division B's offer from the standpoint of the corporation as a whole and from Division A manager's perspective. c.Assume Division A currently sells 2,000 units to the external market and can accept Division B's offer without affecting its external sales.Calculate Division A's residual income with and without the sale to Division B. d.What recommendations would you give to the President of Alpine Ltd.with respect to performance evaluation of the divisions?

An automotive dealership,with a book value of $3,000,000,and total assets of $5,000,000,has a long history of earning 18%.Last year,the company earned $900,000.The owner is considering acquiring another dealership in a nearby town.If the expansion increases income by 50%,what is the maximum amount of investment the owner can make in the new dealership in order to maintain his desired 18% return?

The following data are available for a manufacturing business started as a new company five years ago when the construction cost index was 115: * = "of long-term assets at historical cost" Required: Calculate the return on investment and the residual income for year five based on current cost.The company's required rate of return is 12%.

Good performance measures do not change significantly with the manager's performance but change with factors that are beyond the manager's control.

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 and Assembly Divisions' return on investment based on book values,respectively?

What is the Gamma Division's return on investment?

How should environmental and ethical issues affect managers' performance evaluations?

The cost of capital that is recognized in a residual income calculation is also call the

Most Canadian and U.S.companies use the Sarbanes-Oxley Act (SOX)as a framework for evaluating their internal control.

Moral hazard describes contexts in which,once risk is shared,the individual fails to make as much effort to avoid harm as when risk was not shared.

Chaucer Ltd.has current assets of $450,000 and capital assets of $630,000.Its budgeted production volume for the next fiscal year is 200,000 units.Fixed costs are projected at $400,000 and variable unit costs for the one product produced total $5/unit.The company defines ROI as Operating Income/Total Assets and its required rate of return is 14%. Required: a.What selling price should Chaucer charge for its product if it wishes to achieve a 25% ROI? What is the operating income at this price? b.The general manager for Chaucer receives a bonus equal to 12% of the residual income for the period.Calculate the amount of the bonus assuming the selling price calculated in part a). c.Prepare a brief memo to the President of Chaucer outlining the advantages and disadvantages of ROI and Residual Income.Include your recommendations for the most appropriate method for calculating the bonus.

Well-designed compensation plans for executives focus on risk and long-term incentives.

Deciding if all subunits should have the same required rate of return is an example of