Chapter 11
Performance Measurement in Decentralized
Organizations
Solutions to Questions
11-1 In a decentralized organization,
11-2 The benefits of decentralization include:
(1) by delegating day-to–day problem solving to
quickly to customers and to changes in the
11-3 The manager of a cost center has
control over cost, but not revenue or the use of
11-4 Margin is the ratio of net operating
11-5 Residual income is the net operating
income an investment center earns above the
company’s minimum required rate of return on
a manager of an investment center may reject a
profitable investment opportunity whose rate of
return exceeds the company’s required rate of
time and throughput time is the waiting period
11-8 An MCE of less than 1 means that the
production process includes non-value-added
11-9 A company’s balanced scorecard should
11–10 The balanced scorecard is constructed
to support the company’s strategy, which is a
© The McGraw-Hill Companies, Inc., 2015. All rights reserved.
2 Managerial Accounting, 15th Edition
theory about what actions will further the
company’s goals. Assuming that the company
has financial goals, measures of financial
performance must be included in the balanced
scorecard as a check on the reality of the theory.
If the internal business processes improve, but
the financial outcomes do not improve, the
theory may be flawed and the strategy should
be changed.
The Foundational 15
1. Last year’s margin is:
Net operating income
Margin = Sales
Net operating income
Margin = Sales
5. The turnover for this year’s investment opportunity is:
Sales
Turnover = Average operating assets
$200,000
= = 1.67 (rounded)
$120,000
The Foundational 15 (continued)
6. The ROI for this year’s investment opportunity is:
ROI = Margin × Turnover
= 15% × 1.67 = 25% (rounded)
7, 8, and 9.
10. The CEO would not pursue the investment opportunity because it
lowers her ROI from 32% to 30.9%. The owners of the company
The Foundational 15 (continued)
11. Last year’s residual income is:
Average operating assets ……………….…
$625,000
Net operating income ………………………
$200,000
Minimum required return:
15% × $625,000 ……………………….…
93,750
Residual income …………………………..
$106,250
12. The residual income for this year’s investment opportunity is:
Average operating assets ……………….…
$120,000
Net operating income ………………………
$30,000
Minimum required return:
15% × $120,000 ……………………….…
18,000
Residual income …………………………..
$12,000
13. If the company pursues the investment opportunity, this year’s
residual income will be:
Average operating assets ……………….…
$745,000
Net operating income ………………………
$230,000
Minimum required return:
15% × $745,000 ……………………….…
111,750
Residual income …………………………..
$118,250
14. The CEO would pursue the investment opportunity because it would
raise her residual income by $12,000.
15. The CEO and the company would not want to pursue this investment
opportunity because it does not exceed the minimum required return:
Average operating assets ……………….…
$120,000
Net operating income ………………………
$10,000
Minimum required return:
15% × $120,000 ……………………….…
18,000
Residual income …………………………..
$ (8,000)
Exercise 11-2 (10 minutes)
Average operating assets ………………….
$2,800,000
Net operating income ……………………….
$ 600,000
Minimum required return:
18% × $2,800,000 ………………………..
504,000
Residual income………………………………
$ 96,000
© The McGraw-Hill Companies, Inc., 2015. All rights reserved.
