Exam 23: Performance Measurement, compensation, and Multinational Considerations

Answer the following questions using the information below: The top management at Amore Corp, a manufacturer of computer games, is attempting to recover from a flood that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged: Alpha Division Beta Division Gamma Division Sales \ 5,500,000 () \ 2,500,000 Net operating income \ 3,500,000 \ 1,100,000 \ 1,200,000 Operating assets () () \ 1,600,000 Return on investment 0.25 0.15 (d) Return on sales () 0.10 0.5 Investment turnover () (g) 1.5 -What is the Gamma Division's return on investment (d)?

Many common performance measures,such as customer satisfaction,rely on internal financial accounting information.

In an EVA calculation,the corporate charge for a division's investment is based on a weighted average of the after-tax interest rate on the firm's debt and the cost of the firm's equity.

Historical costs are costs recognized in particular situations that are not usually recognized by accrual accounting procedures.

When managers set and measure target levels of performance and feedback,________.

Using residual income as a measure of performance rather than return on investment promotes goal congruence because residual income ________.

Which of the following statements is true?

Answer the following questions using the information below: The top management at Amore Corp, a manufacturer of computer games, is attempting to recover from a flood that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged: Alpha Division Beta Division Gamma Division Sales \ 5,500,000 () \ 2,500,000 Net operating income \ 3,500,000 \ 1,100,000 \ 1,200,000 Operating assets () () \ 1,600,000 Return on investment 0.25 0.15 (d) Return on sales () 0.10 0.5 Investment turnover () (g) 1.5 -What were the sales for the Beta Division (a)?

Interactive control systems ________.

Some companies present financial and nonfinancial performance measures for various organization units in a single report called the balanced scorecard.

Answer the following questions using the information below: Waldorf Company has two sources of funds: long-term debt with a market and book value of $5 million issued at an interest rate of 12%, and equity capital that has a market value of $4 million (book value of $2 million). Waldorf Company has profit centers in the following locations with the following operating incomes, total assets, and current liabilities. The cost of equity capital is 12%, while the tax rate is 25%. Operating Income Assets Current Liabilities St. Louis \ 480,000 \ 2,000,000 \ 100,000 Cedar Rapids \ 600,000 \ 4,000,000 \ 300,000 Wichita \ 1,020,000 \ 6,000,000 \ 600,000 -What is the EVA for Wichita?

"Cooking the books" means reporting of understated assets and overstated liabilities.

Make a list of steps of designing an accounting based performance measure.Give example of decisions taken under each step.

Companies that adopt the EVA concept define investment as total assets employed minus current liabilities.

An important consideration in designing compensation arrangements is the tradeoff between creating incentives and imposing risks.

Springfield Corporation,whose tax rate is 30%,has two sources of funds: long-term debt with a market value of $6,000,000 and an interest rate of 8%,and equity capital with a market value of $15,000,000 and a cost of equity of 12%.What is Springfield's weighted average cost of capital (WACC)?

The more owners have access to sensitive performance measures,the more they can rely on incentive compensation for their managers.

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: Tractor Division Tiller Division Digger Division Sales \ 10,000,000 () \ 2,400,000 Net operating income \ 1,000,000 \ 1,440,000 \ 600,000 Operating assets () () \ 2,000,000 Return on investment 0.20 0.10 (d) Return on sales () 0.12 0.25 Investment turnover (f) (g) 1.2 -What is the Tiller Division's investment turnover?

Which of the following steps in designing an accounting-based performance measure includes decisions such as defining assets as total assets or net assets in the calculation of return on assets?

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 2015 are budgeted as follows: Sales \ 5,000,000 Less variable costs 2,500,000 Contribution margin 2,500,000 Less fixed expenses Net operating income \ 700,000 Operating assets for the division are currently $3,600,000.For 2015,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.