Chapter 14 407
There would be an expectation of high process quality yield in a job shop because
employees are more likely to be directly engaged in the production/service pro-
Carolina Division might have a low MCE because there is a significant amount
of move distance between operations or idle time.
35. Each student will have a different answer. Some suggestions follow.
Financial Perspective:
Increase revenue from new customers by 15 percent
36. Each student will have a different answer. Some suggestions follow.
Customer Perspective:
Reduce customer returns by 10 percent
37. Each student will have a different answer. Some suggestions follow.
Internal Perspective:
Increase number of suppliers by ten
Reduce time–to-market of clothing purchases by two weeks
38. Each student will have a different answer. Some suggestions follow.
Sustainability Perspective:
percent
Use 100 percent compact fluorescent light bulbs in store
39. a. Annual pre-tax profits = Income increase – Depreciation
Annual depreciation = $4,000,000 ÷ 5 = $800,000
Year 1: $ 300,000 – $800,000 = $ (500,000)
Year 2: $ 500,000 – $800,000 = $ (300,000)
408 Chapter 14
accessible website, in whole or in part.
b. Year 1: $(500,000) × 0.02 = $(10,000)
Year 2: $(300,000) × 0.02 = $ (6,000)
c. Whether Owan will want to invest depends largely on his personal time hori-
zon. Although investing in the project would reduce his compensation during
the first three years, this reduction would be more than offset in the last two
d. Yes. Upper management would likely view the project favorably. Using any
40. a. The high level of variable pay indicates compensation committees and boards
of directors believe that CFOs are in position to substantially influence opera-
b. There may be some risks to making CFO pay so dependent on operating and fi-
nancial results. Because the CFO is in a position of authority over the record
Chapter 14 409
accessible website, in whole or in part.
PROBLEMS
41. a.
Actual
Flexible
Master
Amounts
Budget
Budget
Sales
$ 39,000,000
$ 36,000,000
100%
Var. costs
(29,230,000)
(27,300,000)
(25,200,000)
70%
CM
$ 9,770,000
$ 10,800,000
30%
Fixed costs
(7,230,000)
(7,200,000)
(7,200,000)
Pre-tax income
$ 2,540,000
$ 3,600,000
cost. Budgeted contribution margin was 30 percent of sales.
The actual CM was only 25.05 percent of sales ($9,770,000 ÷ $39,000,000). With-
out knowing the number of units that were sold, the price and variable cost effects
Effect of increase in sales
$ 3,000,000
Effect of increase in variable costs/price decrease
(4,030,000)
Effect of increase in fixed costs
(30,000)
Net effect on pre-tax income
$(1,060,000)
about the cause of the difference.
42. a. Analysis of the statement reveals a strong positive cash flow from operations
that has permitted acquisitions, dividend payouts and debt reductions for the
three years.
b.
Revised
Original
2014 Budget
2014 Budget
Net CF from Operating Activities:
Net income
$ 45,100
$ 45,100
Add reconciling items
4,000
4,000
Total
$ 49,100
$ 49,100
Net CF from Investing Activities:
Sale (purchase) of PP&E
$(54,600)
$ (4,600)
Sale (purchase) of investments
18,400
(15,800)
Other inflows (outflows)
2,400
2,400
Total
$(33,800)
$(18,000)
410 Chapter 14
Net CF from Financing Activities:
Issuing notes for cash
$ (7,000)
$ (7,000)
Paying dividends
(8,000)
(20,000)
Total
$(15,000)
$(27,000)
Net increase (decrease) in cash
$ 300
$ 4,100
settle for that or change plans.
d. The above comparison can quickly give the president an overview of the impact
of the $50,000 LAN project. From the comparison, she can decide whether she
is satisfied with the proposed changes in cash flows. By observing the cash flow
43. a. Accrual accounting measures are subject to manipulation. Some of the more com-
mon manipulations involve increasing or decreasing the level of discretionary ex-
penses such as maintenance and advertising; increasing or decreasing production
b. The cash measure is just as subject to manipulation. For example, cash can be
sented.
d. Yes. In theory, the accrual income probably provides a better gauge of long-
term profitability and is perhaps a better predictor of future cash flows. The an-
e. One possibility would be to utilize a more detailed budgeted income statement,
Chapter 14 411
44. a. Actual income: $28,250,000 $25,885,000 = $2,365,000
Average assets: ($10,200,000 + $12,300,000) ÷ 2 = $11,250,000
Industry ROI = 1.9 × 7.0% = 13.3%
er (8.4 percent versus 7 percent).
b. 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
c. 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
45. a. Actual income: $25,000,000 $23,160,000 = $1,840,000
Average assets: ($8,400,000 + $9,900,000) ÷ 2 = $9,150,000
The division slightly missed its objective for asset turnover. However, the divi-
b. The division needs to improve its asset turnover. Part of the poor performance may
be caused by the large increase in assets ($9,900,000 $8,400,000 = $1,500,000)
c. Income [(from (a)]
$ 1,840,000
Target return ($9,150,000 0.13)
(1,189,500)
Residual income
$ 650,500
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46. a. Sales (100,000 × $30)
$ 3,000,000
CGS (5,200 $9) + (94,800 × $10)
(994,800)
Gross margin
$ 2,005,200
Expenses:
Shipping (100,000 × $0.50)
$ 50,000
Advertising ($5,000 × 12)
60,000
Salaries
700,000
Other costs
590,000
Repairs
10,000
(1,410,000)
Net income before taxes
$ 595,200
Projected income
$ 595,200
Desired return on investment
(0.13 $4,500,000)
(585,000)
Residual income
$ 10,200
b. Sales (105,000 × $30)
$ 3,150,000
CGS (15,000 × $9) + (90,000 × $10)
(1,035,000)
Gross margin
$ 2,115,000
Expenses
Shipping (105,000 × $0.50)
$ 52,500
Advertising ($5,000 × 11)
55,000
Salaries [$700,000 – ($66,000 × 1/12)]
694,500
Other costs
590,000
(1,392,000)
Net income
$ 723,000
$723,000 ÷ $4,500,000 = 16.07% return
supervisor determines that she has made such decisions for the sole purpose of
obtaining her bonus, she may find herself without a job.
47. a. Lancaster Division
Contribution Margin
For the Year Ended November 30, 2013
($000 omitted)
Sales (1,484,000 units)
$ 25,000
Less variable costs:
Costs of goods sold
$16,500
Selling expenses ($2,700 × 40%)
1,080
(17,580)
Contribution margin
$ 7,420
$7,420,000 ÷ 1,484,000 units = $5 per unit CM
Chapter 14 413
b. (1) The pre-tax return on average investment in operating assets employed is 12
percent, calculated as follows:
ROI = Pre-tax operating income ÷ Average assets
*November 30, 2012 assets: $15,750,000 ÷ 1.05 = $15,000,000
= $1,845,000 (0.10 $15,375,000)
= $1,845,000 $1,537,500
= $307,500
c. Lancaster Division management would have been more likely to accept the
to reject any investment that would lower the overall ROI (12 percent for 2013),
even though the return is higher than the required minimum, because this would
lower bonus awards.
Morton Industrial.
(CMA adapted)
48. a. Powerboats ROI = ($18,000,000 $16,200,000) ÷ $15,000,000 = 12%
Sailboats ROI = ($48,000,000 $42,000,000) ÷ $30,000,000 = 20%
b. The Powerboats manager is the most likely to invest in a new project. Such an
than the projected divisional ROI.
c. Such an outcome is inconsistent with overall corporate goals. Companywide,
the projected ROI is ($66,000,000 $58,200,000) ÷ $45,000,000 = 17%
d. If the division managers were evaluated on the basis of residual income, they
would analyze how a new investment would affect the projected overall RI lev-
el in their divisions. The projected overall changes can be found as follows:
414 Chapter 14
Powerboats
Sailboats
Projected ROI on new project
14%
18%
Required target return
15%
15%
Residual return
(1)%
3%
investment’s cost.
49. a. Projected EVA = $2,250,000 (0.10 × $20,000,000) = $250,000
b. You would not invest in the project if it would result in a decline in your overall
projected EVA. Therefore, the maximum amount that you would invest would
be the amount that would leave your projected EVA unchanged:
Pre-tax additional earnings
$ 600,000
Taxes ($600,000 × 0.40)
(240,000)
After-tax change in earnings
$ 360,000
Maximum investment × 0.10 = $360,000
Maximum investment = $360,000 ÷ 0.10
Maximum investment = $3,600,000
c. After-tax income = $2,250,000 + $360,000 = $2,610,000
50. a. MCE = Value-added time ÷ Total time
= 18,600 ÷ 62,000
= 30%
b. Process productivity = Total units ÷ Value-added time
= 838,860 ÷ 1,023,000
= 82%
d. Throughput = Good units ÷ Total time
would have been lower.
Throughput = Good units ÷ Total time
Chapter 14 415
f. Total time – Value-added time = Non-value-added time
34,720 + 18,600 = 53,320 total new time
Throughput = Good units ÷ Total time
g. 1,023,000 × 0.90 = 920,700 good units
Total new time [(from (f)] = 53,320 hours
Throughput = Good units ÷ Total time
costs associated with those activities.
51. a. Based on the conversation between Terry Travers and Bob Christensen, it
seems likely that their motivation would be stifled by the variance reporting
system at Aurora Manufacturing Company. Their behavior may include any of
the following:
tivities, and
frustration from untimely reports and formats that are not useful in their dai-
ly activities.
b. (1) The benefits that can be derived by both the company and its employees
ing:
Variance analysis can provide standards and measures for incentive and
the resolution of problems.
(2) Aurora Manufacturing Company could improve its variance reporting sys-
tem so as to increase employee motivation, by implementing the following:
416 Chapter 14
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the variance analysis.
Distribute reports on a timelier basis to allow quick resolution of prob-
lems.
(CMA adapted)
52. a. Quality (Internal Business Perspective)
defects per million
cost of quality (prevention, appraisal, internal and external failures)
supplier certification or certified items
reduction of supplier base
b. Cost (Financial Perspective)
reduction in data transactions
dollars of product output per employee
c. Production line flexibility (Internal Business Perspective)
reduction in cycle time
reduction in setup time
d. People productivity and development (Internal Business Perspective and Learn-
ing and Growth Perspective)
sales per person
value added per person
employee turnover ratios