CHAPTER 25
REWARDING BUSINESS PERFORMANCE
Brief Learning
Exercises Topic Objectives Skills
B. Ex. 25.1 Motivating employee performance 25-1, 25-6 Analysis, judgment
B. Ex. 25.2 Evaluate business performance using ROI 25-2, 25-3 Analysis
B. Ex. 25.3 Comparing ROI and residual income 25-2, 25-4 Analysis, judgment
B. Ex. 25.4 Balanced scorecard perspectives 25-5 Analysis, judgment
B. Ex. 25.5 Computations for the DuPont model 25-3 Analysis
B. Ex. 25.6 Criticisms of ROI 25-3 Analysis
B. Ex. 25.7 Calculate residual income 25-2, 25-4 Analysis
B. Ex. 25.8 Calculate EVA 25-4 Analysis
B. Ex. 25.9 Variable vs. fixed compensation 25-6 Analysis, judgment
B. Ex. 25.10 Components of ROI 25-2 Analysis, communicatio
n
Learning
Exercises Topic Objectives Skills
25.1 Accounting terminology 25-2–25–6 Analysis
25.2 Balanced scorecard activities 25-1, 25-5 Analysis, judgment
25.3 Employee motivation 25-1 Analysis, judgment
25.4 ROI versus EVA measures 25-2–25–4 Analysis
25.5 Performance and ROI versus residual income 25-2–25–4 Analysis, judgment
25.6 Concerns about ROI 25-2, 25-3 Analysis, judgment,
communication
25.7 Compensation choices 25-1, 25-5,
25-6 Analysis,
communication,
judgment
25.8 Designing compensation schemes 25-6 Analysis, judgment
25.9 Balanced scorecard matching 25-5 Analysis
25.10 City Wide Door ROI and residual income 25-2, 25-4 Analysis, judgment
25.11 Using ROI and EVA for performance evaluation 25-2–25–4 Analysis, judgment
25.12 Finding unknowns 25-2, 25-4 Analysis
25.13 Real World: Home Depot Balanced Scorecard 25-5 Analysis
25.14 Comparing division performance 25-4, 25-5 Analysis, judgment
25.15 Real World: Home Depot’s ROI and EVA 25-4, 25-6 Analysis,
communication,
OVERVIEW OF BRIEF EXERCISES, EXERCISES, PROBLEMS, AND CRITICAL
THINKING CASES
Problems Learning
Sets A, B Topic Objectives Skills
25.1 A,B Empire Hotel/Triple Creek Golf Complex 25-2–25-4 Analysis, judgment,
communication
25.2 A,B Balanced scorecard at Empire/Triple Creek 25-1, 25-5,
25-6 Analysis, judgment,
communication
25.3 A,B Evaluating business unit performance 25-1–25-4 Analysis, judgment,
communication
25.4 A,B Real World: Tootsie Roll Industries 25-2 Analysis, judgment,
research
25.5 A,B ROI and residual income 25-2–25-4 Analysis, communication,
judgment
25.6 A,B Balanced scorecard in the assembly
dept./restaurant 25-5, 25-6 Analysis, communication,
judgment
25.7 A,B Design of management compensation
packages 25-1, 25-6 Analysis, communication,
judgment
25.8 A,B Performance measures and transaction effects 25-2–25-4 Analysis
25.9 A,B ROI, residual income and performance
evaluation 25-2–25-4,
25-6 Analysis, judgment
Critical Thinking Cases
25.1 Business performance and transfer pricing 25-2–4, 25-6 Analysis, communication,
judgment
25.2 Using performance measures 25-1–25-4 Analysis, communication,
judgment
25.3 Real World: Stern Stewart & Company
(Internet) EVA 25-1, 25-4,
25-5 Analysis, communication,
research
25.4 Real World: Tootsie Roll Industries 25-1, 25-6 Analysis, communication,
(Internet) Incentive compensation program research, technology
DESCRIPTIONS OF PROBLEMS AND CRITICAL THINKING CASES
Problems (Sets A and B)
25.1 A,B Em
p
ire Hotel/Tri
p
le Creek Golf Com
p
lex 60 Strong
Computations show that a project that improves the ROI of a department
in the Hotel/Golf Course does not meet the minimum acceptable return
for the Hotel/Golf Course. Shows the problems that arise if incentives are
based on ROI.
25.2 A,B Em
p
ire Hotel/Tri
p
le Creek Golf Com
p
lex 30 Medium
Students must identify measures to improve the hotel housekeeping/pro
shop staff’s performance using a balanced scorecard approach. Because
individual students’ answers will be different, this makes a good class
discussion question.
25.3 A,B Fairfax Industries/Wilson Com
p
an
y
30 Medium
This problem demonstrates the impact of a choice of depreciation
method on operating earnings. Because operating earnings are
instrumental in determining the performance evaluation and resulting
bonus of the manager of a division, the ethics of the choice are
considered.
25.4 A,B Tootsie Roll Industries 20 Medium
This problem demonstrates that information found in annual reports can
be used to evaluate business segments. Financial information for
computing ROI, capital turnover, and return on sales is included.
25.5 A,B Fastwhere Inc./Save Some, Inc. 40 Strong
A set of potential investment projects is evaluated on both ROI and
residual income measures. The calculations demonstrate that the project
rankings are different if residual income is used rather than ROI to rank
project attractiveness.
25.6 A,B Valance Auto
p
arts/Eatwell Restaurant Chain 40 Strong
This problem asks students to role play as a consultant to a firm that is
having some problems with the balanced scorecard approach. It is a good
problem to be used for a group report or presentation.
25.7 A,B Hinkley Corporation/Bronson Corporation 15 Easy
Students consider management compensation plans described for each
company. Students are asked to identify the compensation design choices
made b
y
the board of directors.
Below are brief descriptions of each problem and case. These descriptions are accompanied by the
estimated time (in minutes) required for completion and by a difficulty rating. The time estimates
assume use of the partially filled-in working papers.
25.8 A,B Hopenstat Inc./ Frangling International 20 Medium
Students identify the effects of various transactions on computations of
ROI, residual income, and capital turnover.
25.9 A,B Marfar Industries / Warthers Corporation 30 Medium
After computing residual income and ROI for a division of the
company, students explain differences in investment choices that the
managers would make when they are evaluated with ROI or residual
income.
Critical Thinking Cases
25.1 Business Performance and Transfer Prices 30 Medium
Transfer pricing between business units can create difficulties with
allocating bonuses and create poor incentives for business unit
managers. In addition, ethical issues can arise that are highlighted by
improving personal performance at the expense of company
performance.
25.2 Big Bertha Sub Shops 60 Strong
ROI and residual income comparisons for two sub shops demonstrates to
students how evaluating sub shop managers based on ROI can lead to
poor decision making outcomes.
25.3 EVA 30 Medium
Internet
Provides a student with a perspective of the benefits of using EVA for
business performance evaluation.
25.4 Tootsie Roll’s Incentive Compensation Program 50 Strong
Internet
Students access the Tootsie Roll proxy statement from the SEC Edgar
database to understand which employees are covered and what types of
accounting goals are used.
SUGGESTED ANSWERS TO DISCUSSION QUESTIONS
1.
2.
Accounting systems help align goals of employees and the goals of the organization for which
they work by identifying the organization’s goals through budget reports, providing feedback to
Goals for a new restaurant might include earning a return on invested capital at least above the
rate that could be earned in a time deposit in a bank. To earn such a return, a new restaurant will
7.
8.
Residual income is a measure like EVA that requires a proposed investment to have a return
above the companywide required rate. A manager whose business unit was evaluated on ROI
The international operations of Tootsie Roll include Mexico and Canada. The board of
directors may want to emphasize long-run performance over the short-run by providing stock
options that are not exercisable for three to five years. Also, basing the performance
14.
15.
The costs of a cooperative incentive plan include the actual cost of the bonus paid out and the
opportunity cost of free riders. Free riders do not contribute up to their potential and allow
In addition to the cost of the bonus, competitive incentive arrangements can have opportunity
SOLUTIONS TO BRIEF EXERCISES
B. Ex. 25.1 Because the pet shop compensation includes both a fixed (salary) and a variable
(commission) component, employees are only paying attention to the portion they
B. Ex. 25.2 Capital Turnover using total assets = CT = $2,500,000 ÷ $6,250,000 = 40%.
Capital Turnover using net assets = CT = $2,500,000 ÷ ($6,250,000 – $1,250,000) =
50%. The manager will prefer using net assets as the base because using net
assets.
B. Ex. 25.4 Ricoh Company, Ltd. is a Japanese company. Their balanced scorecard appeared
in The Balanced Scorecard Collaborative, Inc. collection of best balanced
B. Ex. 25.5 Division 1 ROI = $600,000 ÷ $4,000,000 = 15%
B. Ex. 25.6 If the Division 1 manager purchased the new equipment, the new ROI would be:
Division 1 ROI = ($600,000 + $30,000) ÷ ($4,000,000 + $1,250,000) = 12%.
B. Ex. 25.8 If the EVA is $4,000,000, then $4,000,000 = After Tax Income – ($30,000,000 ×
10%).
B. Ex. 25.9 Because top managers can have significant impacts throughout the entire business,
Enron and WorldCom.
B. Ex. 25.10 Boris could increase the auto part division’s ROI by decreasing the cost of raw
materials thus decreasing cost of goods sold expense and increasing operating