23-28
effects of these factors provides better information about a manager’s performance. What is
critical, however, for benchmarking and relative performance evaluation to be effective is that
similar noncontrollable factors affect each division. It is not clear that the same noncontrollable
2. Using measures like RI and ROI—diagnostic levers of control—can cause managers to
cut corners and take other actions that boost short-run performance but harm the company in the
3. Another potential problem of an excessive focus on diagnostic measures is a myopic
disregard for emerging threats and opportunities. Interactive control systems, based on debate
23-34 (20 min.) Executive compensation, balanced scorecard.
The percentage changes in net income and customer satisfaction in the three business units
23-30
23-35 (25 min.) Ethics, manager’s performance evaluation (A. Spero, adapted).
1a. Variable manufacturing cost per unit = $3
Fixed manufacturing cost per unit = $8,000,000 400,000 = $20
Total manufacturing cost per unit = $3 + $20 = $23
Revenues, $25 400,000 $10,000,000
2. It would not be ethical for Jones to produce more units just to show better operating
results. Professional managers are expected to take operating actions that are in the best interests
3. Asking distributors to take more products than they need is also equivalent to “cooking
the books.” In effect, distributors are being coerced into taking more product. This is a particular
23-31
23-36 (15 min.) Ethics, levers of control.
1. If Frank Jessup “turns a blind eye” toward what he has just observed at the Dallas
distribution center, he will be violating the competence, integrity, and objectivity standards for
management accountants.
Competence
• Perform professional duties in accordance with technical standards
2. Monroe is clearly emphasizing profit, driving managers to find ways to keep profits
strong and increasing. This is a diagnostic measure, and over-emphasis on diagnostic measures
can cause employees to do whatever is necessary—including unethical actions—to keep the
measures in the acceptable range, not attract negative senior management attention and possibly
23-32
23-37 (45 minutes) RI, EVA, Measurement alternatives, Goal congruence.
1.
Spa
Operating
Income
–
Required
Rate of
Return
×
Investment
=
Residual
Income
Ft. Meyers
$1,220,000
–
(11%
×
6,155,000)
=
$542,950
Scottsdale
1,190,000
–
(11%
×
6,312,000)
=
495,680
Monterey
1,295,000
–
(11%
×
7,435,000)
=
477,150
The residual income from the new saunas would be:
$22,000 operating income – ($225,000 investment ×11% required rate) = ($2,750)
Because the RI of the project is negative, the rate of return on the project is less than the required
rate of 11%, and the Ft. Meyers manager would reject the project. Other managers would also
reject the project because they all face a required rate of return of 11%.
2. Renewal Resorts may want to use EVA instead of RI because EVA explicitly takes into
consideration both the weighted-average cost of capital and the effect of income taxes. EVA
3. WACC =
8% (1 35%) $15,300,000 (14% $7,650,000) $1,866,600 8 13%
$15,300,000 $7,650,000 $22,950,000 .
− + =
+=
4.
EVA = After-tax operating income – [WACC × (Total assets – current liabilities)]
Using net book value of assets:
Ft. Meyers EVA = ($1,220,000 × 65%) – [8.13% × ($6,155,000 – $330,000)]
23-33
Using gross book value of assets:
Ft. Meyers EVA = ($1,220,000 × 65%) – [8.13% × ($8,355,000a – $330,000)]
= $793,000 – $654,058.50
= $140,567.50
5. If Renewal Resorts chooses to use gross book value of assets in its EVA calculation, it may
achieve greater goal congruence, as spa managers will be less reluctant to invest in newer assets