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PROBLEM 25.5
A
a.
c.
d.
Operating Income Residual Income
e.
PROJECT - rank
The ranking for ROI showed project A-1 preferred over A-3. However, the ranking for
residual income showed project A-3 preferred over A-1. More importantly, if Bob is
evaluated on ROI, he would only consider undertaking projects A-1 or A-2 because they
are the only projects that would raise his current ROI of 14%.
Residual income = $49,000 – ($500,000 x 12%) = ($11,000)
Alternatively:
Residual income = (9.8% – 12%) x $500,000 = ($11,000)
For ROI the ranking would be A-2 –1st, A-1 –2nd, A-3 –3rd, A-4 –4th and A-5 –5th.
However, all but the first two would be unacceptable. For Residual income, the following
would be the ranking:
40 Minutes, Medium
FASTWHERE INC.
Any project with an ROI of 14% or better would be attractive to Bob and would improve
the ROI of Bob’s location. Thus projects A-1 and A-2 would be acceptable.
Project A-5 has a negative residual income as follows:
PROBLEM 25.6
A
V
ALANCE AUTOPART
S
TO: Plant Manager
FROM: Consultants Incorporated
RE: Balanced Scorecard Problems in the Assembly Department
•
40 Minutes, Medium
The following problems have been observed in the Assembly Department and recorded from
our conversations with Ms. Joyce Biginskor, supervisor of the Assembly Department.
MEMO
There are too many measures being used for a relatively minor department of the plant. As
a result, there is confusion about what to focus on and which of the measures are important
to achieve the goals.
We suggest that you choose one or at most two measures for each category of the balanced
scorecard for the Assembly Department. These measures should be relatively easy to measure
information system that must measure all of the balanced scorecard variables is very costly
and disruptive to the workflow in the Assembly Department.
15 Minutes, Easy PROBLEM 25.7
A
MANAGEMENT COMPENSATIO
N
HINKLEY CORPORATION
Base Salaries: These are fixed incentives. Also these are local, because the amount is based on
the specific job.
Annual Bonus: These are short-term incentives that are fixed in nature. These incentives can
be competitive if the total bonus pool is a fixed pie. These are accounting based incentives and
are frequently local in nature because they are awarded for achieving specific local goals.
Long-Term Incentives: Obviously long term incentives that are variable and are stock-based.
These can be competitive in the awarding process, but are cooperative in the incentive to
increase the overall value of the firm. Thus, these incentives are company-wide.
20 Minutes, Medium PROBLEM 25.8
A
HOPENSTAT INCORPORATE
D
a.
Assuming sales revenue does not change, then net income is higher because of the lower
R&D expenses and both ROI and residual income increase. Capital turnover does not
change.
30 Minutes, Medium PROBLEM 25.9
A
MARFAR INDUSTRIE
S
1. a.
Average investment base = (beginning of year base - end of year base) ÷ 2. Beginning
of year × 1.05 (5% increase) = end of year = $12,600,000. Thus, beg. year =
SOLUTIONS TO PROBLEMS SET B
a.
PROBLEM 25.1B
60 Minutes, Strong
TRIPLE CREEK GOLF COMPLEX
Triple Creek Golf Complex
Customer beliefs are key to
measurement:
To improve the reputation of the
Pro Shops: Use surveys and resources
consumed to provide feedback:
30 Minutes, Medium
a. GOALS b. MEASUREMENTS
and RESOURCES
PROBLEM 25.2B
c. FEEDBACK
Choosing to use only residual income suffers from many of the same problems as using ROI.
That is, the manager for the Pro Shops Department will want to reduce operating expenses to
improve operating earnings. Thus the manager will still try to skimp on the staff wages.
Assuming that a strategic goal of the Complex is to maintain a good reputation by having high
customer satisfaction, then a balanced scorecard approach to business performance
measurement is preferred. In particular, for the Pro Shops Department consider the following:
TRIPLE CREEK GOLF COMPLEX
b.
$ 2,500,000
PROBLEM 25.3B
WILSON COMPANY
30 Minutes, Medium
a.
The Toy Division’s ROI and residual income (RI) are computed as follows:
The manager’s bonus is computed as follows:
Residual Income (part a) …………………………………………………………
…
United Mexico and United
States Canada States
Year 1
Mexico and
Canada
PROBLEM 25.4B
20 Minutes, Medium
TOOTSIE ROLL INDUSTRIES
AT TOOTSIE ROLL
Year 2
