Chapter 20 - Performance Measurement, Compensation, and Multinational Considerations

1) Assume you are evaluating a manufacturing company. Match the various organizational activities and
concepts with the performance measures listed. Some items may have more than one match.

Activities:
1. Change in revenues
2. Cycle time
3. Economic order quantity
4. Manufacturing defects
5. Market share
6. New products
7. On-time delivery
8. Operating income
9. Product reliability
10. Time-to-market

Performance measure:

________ a. Profitability

________ b. Customer satisfaction

________ c. Innovation

________ d. Efficiency, quality, and time

2) Antique Corp uses the investment center concept for the museums that it manages. Selected operating
data for three of its museums for 2022 are as follows:

Ohio Dallas Texas

Revenue $1,200,000 $1,500,000 $1,800,000
Operating assets 700,000 500,000 600,000
Net operating income 105,000 115,000 120,000

Required:
a. Compute the return on investment for each division.
b. Which museum manager is doing best based only on ROI? Why?
c. What other factors should be included when evaluating the managers?
3) Gas Supply Corporation uses the investment center concept for the gasoline stations that it manages in
the city. Company has a 15% required rate of return on investment in order for a branch station to be
viable. Select operating data for three of its stations for 2022 are as follows:

Maple Street Oak Street High Street

Revenue $17,000,000 $13,500,000 $15,000,000
Operating assets 7,000,000 7,000,000 6,000,000
Net operating income 900,000 1,200,000 980,000

Required:
a. Compute the return on investment for each station.
b. Which station manager is doing best based only on ROI? Why?
c. Are any of the stations in danger of being closed due to lack of performance?
d. What other factors should be included when evaluating the managers?
4) Moto Corp allows its divisions to operate as autonomous units. The operating data for 2022 follow:

Plows Tractors Combines

Revenues $2,250,000 $500,000 $4,800,000
Accounts receivable 800,000 152,500 1,435,000
Operating assets 1,000,000 400,000 1,750,000
Net operating income 220,000 60,000 480,000
Taxable income 165,000 90,000 385,000

Required:
a. Compute the investment turnover for each division.
b. Compute the return on sales for each division.
c. Compute the return on investment for each division.
d. Which division manager is doing best? Why?
e. What other factors should be included when evaluating the managers?

For parts (b) and (c) income is defined as operating income.

5) Batman Abstract Company has three divisions that operate autonomously. Their results for 2022 are as
follows:

Riddler Joker Penguin

Sales $5,000,000 $7,000,000 $10,000,000
Contribution margin 1,440,000 1,700,000 3,500,000
Operating income 1,000,000 1,750,000 2,520,000
Investment base 9,000,000 10,000,000 14,000,000

The company's desired rate of return is 20%.

Required:
a. Compute each division's ROI.
b. Compute each division's residual income.
c. Rank each division by both ROI and residual income.
d. Which division had the best performance in 2022? Why?
d. As to which division was the best, it is difficult to determine without
knowing what the results are being used to evaluate. If management is
measuring only the return of capital, the Penguin Division has the highest
ranking, although not much ahead of Joker. However, Penguin does have a
substantially higher income level. As to meeting management's
expectations of residual income, all divisions fall short of the goal with
Joker being slightly ahead of Penguin.
6) Coptermagic Company supplies helicopters to corporate clients. Coptermagic has two sources of
funds: long term debt with a market and book value of $32 million issued at an interest rate of 10%, and
equity capital that has a market value of $18 million (book value of $8 million). The cost of equity capital
for Coptermagic is 15%, and its tax rate is 30%. Coptermagic has profit centers in four divisions that
operate autonomously. The company's results for 2022 are as follows:

Operating Assets Current

Income Liabilities
New York $1,750,000 $11,500,000 $2,500,000
Chicago 2,400,000 9,000,000 3,500,000
Dallas 4,675,000 27,500,000 9,500,000
Los Angeles 4,200,000 25,000,000 8,000,000

Required:
a. Compute Coptermagic's weighted average cost of capital.
b. Compute each division's Economic Value Added.
c. Rank the divisions by EVA.
7) Craylon Corp. is planning the 2023 operating budget. Average operating assets of $1,800,000 will be
used during the year and unit selling prices are expected to average $100 each. Variable costs of the
division are budgeted at $500,000, while fixed costs are set at $300,000. The company's required rate of
return is 18%.

Required:
a. Compute the sales volume necessary to achieve a 20% ROI.

b. The division manager receives a bonus of 50% of residual income. What is his anticipated bonus for
2023, assuming he achieves the 20% ROI from part (a)?
8) 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 2023 are budgeted as follows:

Sales $5,000,000
Less variable costs 2,500,000
Contribution margin 2,500,000
Less fixed expenses 1,800,000
Net operating income $ 700,000

Operating assets for the division are currently $3,600,000. For 2023, 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.
9) Capital Investments has three divisions. Each division's required rate of return is 15%. Planned
operating results for 2022 are as follows:

Division Operating income Investment

A $15,000,000 $100,000,000
B $25,000,000 $125,000,000
C $11,000,000 $ 50,000,000

The company is planning an expansion, which will require each division to increase its investments by
$25,000,000 and its income by $4,500,000.

Required:
a. Compute the current ROI for each division.

b. Compute the current residual income for each division.

c. Rank the divisions according to their current ROIs and residual incomes.

d. Determine the effects after adding the new project to each division's ROI and residual income.

e. Assuming the managers are evaluated on either ROI or residual income, which divisions are pleased
with the expansion and which ones are unhappy?
e. Everyone would be pleased if residual income was used
because residual incomes increase with the expansion. However,
it would be difficult to evaluate each division on a comparative
basis because each division's investment base is different.

Only the manager of Division A is pleased with the new

investment if ROI is used because that is the only division with an
increased ROI. In the case of additional investments that are
required by corporate management, residual income may be the
best to use for evaluating each manager individually, but not
collectively.