Exam 16: Performance Evaluation and Compensation

Choices about decision-making authority and about organizational structure are often related.

Bellingham Division has a required rate of return by corporate headquarters of 20%. The weighted average cost of capital is 12%. You are given the following information for Bellingham's operations for a two-year period: 2005 2004 Current assets $ 50,000 $ 60,000 Long-term assets 200,000 204,000 Accumulated amortization 60,000 44,000 Current liabilities 40,000 20,000 Long-term debt 100,000 140,000 Operating income for the year 19,000 21,000 Tax rate 40% 40% The average investment to be used in the EVA computation for 2005 was:

For 2005, Aberdeen's return on sales was 10% and its investment turnover was 2.0. Return on investment for 2005 was:

Decision-making based on general knowledge is more likely to occur in this type of organization:

A transfer price is required only when goods or services are transferred between cost centres in the same organization.

Responsibility accounting includes: I. Monitoring primarily for mistakes II. Assigning authority to subunit managers III. Measuring the performance of subunit managers

If manufacturing departments are only responsible for production decisions, they are considered cost centres.

Return on investment is typically calculated as net income divided by total sales.

The Machining Division has a capacity of 2,000 units. Its sales and cost data are: Selling price per unit $100 Variable manufacturing costs per unit $25 Variable administrative costs per unit $5 Total fixed manufacturing overhead $20,000 Total fixed administrative costs $5,000 Return on Investment is:

The manager in a profit centre is responsible for:

Teresa's Taco Co. had the following results during the most recent year: Sales $500,000; Residual income $5,000; investment turnover 2.5; and a required rate of return of 15%. The operating (pretax)income was:

Budgets can be used to evaluate managerial performance in: I. Cost centres II. Profit centres III. Investment centres

Why should executive compensation in public companies be set by an independent compensation committee of the board of directors?

The Eastern Division of WDY Corporation reported net income of $2,500, operating income of $4,000, average equity of $24,000, and average operating assets of $30,000 in a recent accounting period. If Eastern's required rate of return is 12%, its residual income was

Residual income is calculated as:

To protect shareholders from excessive compensation practices, executive compensation packages are best set by:

Managers often make choices about the location of decision-making responsibility. What is the relationship between the type of knowledge that is important in the organization and the location of decision-making authority?

A corporate accounting department would most often be considered a:

Following is information for the Krishnan Company's three business divisions: Division A Division B Division C Pretax operating income $800,000 $400,000 $600,000 Current assets 80,000 60,000 80,000 Long-term assets 3,200,000 2,600,000 1,600,000 Current liabilities 400,000 200,000 300,000 Krishnan's tax rate for the divisions is 30%, and its after-tax weighted-average cost of capital (WACC)for each segment is 12%. The WACC is also used as a required rate of return. a)Determine the division with the highest ROI. Show your calculations. b)Determine the division with the highest residual income. Show your calculations. c)Determine the segment with the highest EVA. Show your calculations. d)Compare and contrast these three performance measures and their influence on managers. e)Why is it better to use multiple measures for evaluating manager performance rather than a single measure such as ROI or EVA?

Delta Division had the following results for the year just ended: Sales $375,000 Variable costs 225,000 Fixed costs 120,000 Total operational assets 150,000 Delta is considering a new product line that would involve the following: Sales $75,000 Variable costs 45,000 Fixed costs 23,250 Total operational assets 37,500 Delta's parent company, Omega, Inc., has a company-wide ROI of 14% and pays bonuses based on divisional ROI. a)Determine the effect on Delta's ROI if it introduces the new product line. Would Delta's managers be encouraged to introduce the new product line? b)Determine the effect on Omega's ROI if Delta introduces the new product line. Would the top managers of Omega want to introduce the new product line? c)Assume a required rate of return of 10% on operational assets invested in each division. Determine the effect on Delta's residual income if it introduces the new product. Would Delta's managers be encouraged to introduce the new product line?