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SOLUTIONS TO EXERCISES
Ex. 25.1 a. Return on sales
b. Capital turnover
c. Balanced scorecard
Ex. 25.2
Ex. 25.3
In order to create a balanced scorecard, the management accountant will need to
identify the organization’s goals and objectives related to the product lines. For
example, does the organization want to be a low-cost producer, or are they
Student answers will differ but, measures that might encourage these behaviors
would be to suggest to employees that they have complete control of their
computer and time-related resources. In addition, if the company has a complete
hands-off policy with regard to monitoring any employee computer activities, it is
Ex. 25.4 a. Division B is more profitable because it has a higher after tax operating income.
If the manager is evaluated on residual income then projects A and B have
positive or incremental residual income. Project C's residual income is expected
Yes, the preference shifts from A to B because B has a higher ROI than A.
Ex. 25.6
• Because the business seems to be growing quickly, the division managers are
likely to be shifting jobs over short time horizons. Thus, the short horizon
problem will be a problem with the use of ROI.
• Additionally, Ms. Baskiter should be concerned with the underinvestment
problem that can occur with using ROI as the primary evaluation and reward
measure. Managers may not be motivated to undertake investments that would
improve the overall ROI of Plants&More.com but would not improve their
particular division’s ROI.
Ms. Baskiter should consider the following issues:
Ex. 25.5 a.
b.
Ex. 25.7
• The annual cash bonus focuses on current performance and neglects to
provide for a future orientation. Managers may make decisions to increase
their current cash bonus that are detrimental for the long-run success of the
Finally, to adequately measure ROI, Ms. Baskiter must create a means of
assigning revenues, expenses, and capital between the two divisions. This is a task
that sometimes involves arbitrary decisions that managers find objectionable.
Criticisms of the current performance plan include:
Ex. 25.9 a. Direct labor efficiency variance – B
b. After tax profits – F
c. Customer turnover per sales dollar – C (or F)
d. Parts per million defects – B
Ex. 25.10
A = $12,000 ÷ $60,000 = 20%
B = $18,000 ÷ $72,000 = 25%
Ex. 25.11 a. ROI = $187,500 ÷ $750,000 = 25%
b. EVA = $187,500 - [16% × ($750,000 - $150,000)] = $91,500
c. If ROI is used to evaluate performance, projects with potential returns higher
Ex. 25.12 Company X
a. Return on Sales = Income ÷ Sales; thus, 32% = $220,000 ÷ Sales.
Sales = $220,000 ÷ 32% = $687,500.
b. Ca
p
ital Turnover = Sales ÷ Invested Ca
p
ital; thus, 20% = $687,500 ÷ Invested
Invested Capital = $687,500 ÷ 20% = $3,437,500.
c. Return on Investment = $220,000 ÷ $3,437,500 = 6.4%.
d. Residual Income = $220,000 - (10% × $3,437,500) = ($123,750).
If the company chose to evaluate the proposals based on ROI:
Ex. 25.13
Student answers will vary based on their choices. In addition, it is likely that some
measures will be chosen for more than one balanced scorecard perspective. For
example, "Number of associates at year-end" might be considered by some
students to be a measure for the customer perspective (more sales personnel
Company YEx. 25.12
Ex. 25.14 a. STORES CYBER
$10,000,000 - [.08 ×
(
$120
,
000
,
000 - $4
,
500
,
000
)]
= $1,000,000 - [.10 ×
(
$15
,
000
,
000 - $2
,
500
,
000
)]
=
$760,000 ($250,000)
b.
Ex. 25.15 ROI for the year ending 1/29/12 = $3,883 ÷ $24,448 = 15.9%
ROI for the year ending 2/3/13 = $4,535 ÷ $24,069 = 18.8%
EVA
The Cyber division is a new division and the strategic goals for the company
EVA for the year ending 1/29/12 = $3,883 - [10% x ($40,518 - $9,376)] = $768.8
PROBLEM 25.2
A
room
dollar of supplies used.
Value per dollar Cleaning supplies used Change in satisfaction per
hour of supervisory time.
30 Minutes, Medium
a. GOALS
b. MEASURMENTS
and RESOURCES
c. FEEDBACK
Choosing to use only residual income suffers from many of the same problems as using ROI.
That is, the manager for the Hotel Rooms Department will want to reduce operating expenses to
improve operating earnings. Thus, the manager will still try to skimp on the housekeeping.
following:
EMPIRE HOTEL AND THE BALANCED SCORECARD
30 Minutes, Medium PROBLEM 25.3A
FAIRFAX INDUSTRIES
a. The Snacks Division’s ROI and residual income (RI) are computed as follows:
ROI = Operating Earnings ÷ Average Invested Capital
United Mexico and United
States Canada States
Both U.S. assets and net foreign assets decreased. This could be a result of foreign exchange
fluctuations and/or the result of increased accumulated depreation. Also, earnings increased
between year 1 and year 2 for the U.S. operations, but decreased slightly for the foreign
subsidiaries, as the following table shows (dollar amounts are in 000s):
Year 2 Year 1
PROBLEM 25.4A
20 Minutes, Medium
TOOTSIE ROLL INDUSTRIES
Mexico and
Canada
