Exam 23: Performance Measurement, compensation, and Multinational Considerations

The objective of maximizing return on investment may induce managers of highly profitable divisions to reject projects that from the viewpoint of the overall organization should be accepted.

There should be strict congruence between the performance evaluation of a subunit and the performance evaluation of that subunit's manager.

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?

Care Inc. ,has two divisions that operate independently of one another.The financial data for the year 2015 reported the following results: The company's desired rate of return is 10%.Income is defined as operating income. Which division has the best return on investment and which division has the best residual income figure,respectively?

Provide the missing data for the following situations:

Aaron Corp's net income is $25,000.What is the amount of the investment if the return on investment is 30%?

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 were the sales for the Tiller Division? (Round the final answer to the nearest whole dollar. )

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 2018: The company is currently using a 14% required rate of return. What are Wheels's and Assembly's return on investment based on current values,respectively?

Discuss the issues and complications that may arise when multinational corporations conduct performance measurement and comparisons among divisions located in different countries.

Vega Corp's 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.

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

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.

An important element in designing accounting-based performance measures is choosing the time horizon of the performance measures.Discuss.

Stonex Corp,whose tax rate is 35%,has two sources of funds: long-term debt with a market value of $6,200,000 and an interest rate of 9%,and equity capital with a market value of $14,000,000 and a cost of equity of 13%.Stonex has two operating divisions,the Blue division and the Gold division,with the following financial measures for the current year: Calculate EVA for the Gold Division.(Round intermediary calculations to four decimal places. )

In an EVA calculation,the measure of the invested capital for a division would be that division's assets minus that division's long-term liabilities.

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: What is the value of the operating assets belonging to the Alpha Division (b)?

The required rate of return multiplied by the investment is the ________.

Bob's Cellular Phone Company uses ROI to measure divisional performance.Annual ROI calculations for each division have traditionally employed the ending amount of invested capital along with annual operating income and net revenue.The Dupont method is generally used.The company's Phone Accessories Division had the following results for the last two years: 2015 ROI = ($2,000,000/$20,000,000)× ($20,000,000/$10,000,000)= 0.20 2016 ROI = ($2,400,000/$25,000,000)× ($25,000,000/$15,000,000)= 0.16 Corporate management was disappointed in the performance of the division for 2016,since it had made an additional investment in the division that was budgeted for a 23% ROI. Required: a.Discuss some factors that may have contributed to the decrease in ROI for 2016. b.Would there have been any substantial difference if average capital had been used?

Care Inc. ,has two divisions that operate independently of one another.The financial data for the year 2015 reported the following results: The company's desired rate of return is 10%.Income is defined as operating income. What are the respective return-on-investment ratios for the North and South Divisions?

A report that measures financial and nonfinancial performance measures for various organization units in a single report is called a(n)________.