Exam 12: Performance Evaluation and Decentralization

Decentralization is usually achieved by creating units called divisions.

A key feature of economic value added (EVA)is that it emphasizes after-tax operating income and the actual cost of capital.

Sentenal Company had income of $20,000,average assets of $200,000,and sales of $80,000.What is Sentenal's ROI?

Provide the missing data in the following situations: $\begin{array}{lrrr}&\text { Northern } & \text { Southern } & \text { Eastern } \\&\text { Division } & \text { Division } & \text { Division }\\\text { Sales } & \$(\mathrm{~A}) & \$ 250,000 & \$(\mathrm{G}) \\\text { Operating assets } & \$(\mathrm{~B}) & \$(\mathrm{D}) & \$ 800,000 \\\text { Net operating income } & \$ 400,000 & \$ 10,000 & \$ 144,000\\\text { Margin } & 0.08 & (\mathrm{E}) & 0.12 \\\text { Tumover } & (\mathrm{C}) & (\mathrm{F}) & 1.5 \\\text { Retum on investment } & 16 \% & 10 \% & (\mathrm{H})\end{array}$

Residual income is sometimes used to overcome the tendency of ROI to discourage investments that are profitable for the company but that lower the division's ROI.