Problem 14-44 Name:
Insert your answers in the gray-shaded cells. If an answer is incorrect,
the word “wrong” will appear.
a. Sales 28,250,000$
Less operating expenses 25,885,000
Actual income 2,365,000$
Beginning assets 10,200,000$
Ending assets 12,300,000
Total assets 22,500,000$
Divided by 2
Average assets 11,250,000$
Income 2,365,000$
Divided by sales 28,250,000
Profit margin 8.37%
Sales 28,250,000$
Divided by average assets 11,250,000
Asset turnover 2.51
Spruce Enterprises ROI:
Asset turnover 2.51
Profit margin 8.37%
ROI 21.01%
Industry ROI:
Asset turnover 1.90
Profit margin 7.00%
ROI 13.30%
Comment:
b.
Solution
For 2013, the company’s stores significantly outperformed the industry (21% vs
13.3%). The better performance was largely attributable to a higher asset turnover
relative to the industry standard (2.51 versus 1.9). Although the profit margin also
exceeded the industry standard, the difference was smaller (8.37% versus 7%).
Where, as indicated by the performance measures, are the most likely areas to
improve performance in the retail lumber stores?
c.
What are the advantages and disadvantages of setting a performance target at
the start of the year compared with one that is determined at the end of the year
based on actual industry performance?
The advantage of setting performance measures at the beginning of the year is
that management knows what the benchmark figures are as the year unfolds.
The main disadvantage is that targets set at the beginning of the year do not
control for industry level factors’ influence on results. Consequently, managers
will be evaluated partly on factors that they cannot control.
Because the stores are already operating significantly above industry norms on
asset turnover, corporate management should concentrate on improving the profit
margin ratio. Profit margin can be improved by either increasing sales price or
decreasing costs. However, overall, the stores are already exceeding the industry
ROI so management must be careful not to decrease asset turnover while they
strive to increase sales price or decrease costs.