Solutions Manual, Chapter 12 1
Chapter 12
Performance Measurement in Decentralized
Organizations
Solutions to Questions
12-1 In a decentralized organization,
authority is spread throughout the organization.
12-2 The benefits of decentralization include:
have the most detailed and up–to-date
decisions can increase their motivation and job
satisfaction.
funds.
12-4 Margin is the ratio of net operating
income to total sales. Turnover is the ratio of
12-5 Residual income is the net operating
income an investment center earns above the
company’s minimum required rate of return on
12-6 If ROI is used to evaluate performance,
a manager of an investment center may reject a
profitable investment opportunity whose rate of
of return will result in an increase in residual
is value-added time and inspection time, move
time, and queue time are non-value-added time.
activities.
12-9 A company’s balanced scorecard should
be derived from and support its strategy.
different.
12-10 The balanced scorecard is constructed
2 Managerial Accounting for Managers, 4th Edition
theory about what actions will further the
performance must be included in the balanced
scorecard as a check on the reality of the theory.
If the internal business processes improve, but
be changed.
The Foundational 15
1. Last year’s margin is:
Net operating income
Margin = Sales
$200,000
= = 20%
$1,000,000
2. Last year’s turnover is:
Sales
Turnover = Average operating assets
$1,000,000
= = 1.6
$625,000
3. Last year’s return on investment (ROI) is:
ROI = Margin × Turnover
= 20% × 1.6 = 32%
4. The margin for this year’s investment opportunity is:
Net operating income
Margin = Sales
$30,000
= = 15%
$200,000
5. The turnover for this year’s investment opportunity is:
Sales
Turnover = Average operating assets
$200,000
= = 1.67 (rounded)
$120,000
4 Managerial Accounting for Managers, 4th Edition
The Foundational 15 (continued)
6. The ROI for this year’s investment opportunity is:
ROI = Margin × Turnover
= 15% × 1.67 = 25% (rounded)
If the company pursues the investment opportunity, this year’s margin,
turnover, and ROI would be:
Net operating income
Margin = Sales
$200,000 + $30,000
=
$1,000,000 + $200,000
$230,000
= = 19.2% (rounded)
$1,200,000
Sales
Turnover = Average operating assets
$1,000,000 + $200,000
= $625,000 + $120,000
$1
= ,200,000 = 1.61 (rounded)
10. The CEO would not pursue the investment opportunity because it
Solutions Manual, Chapter 12 5
The Foundational 15 (continued)
11. Last year’s residual income is:
Average operating assets …………….
$625,000
Net operating income …………………
$200,000
Minimum required return:
15% × $625,000 …………………….
93,750
Residual income ………………………..
$106,250
12. The residual income for this year’s investment opportunity is:
Average operating assets …………….
$120,000
$30,000
Minimum required return:
15% × $120,000 …………………….
18,000
Residual income ………………………..
$12,000
13. If the company pursues the investment opportunity, this year’s
residual income will be:
Average operating assets …………….
$745,000
Net operating income …………………
$230,000
Minimum required return:
15% × $745,000 …………………….
111,750
Residual income ………………………..
$118,250
15. The CEO and the company would not want to pursue this investment
opportunity because it does not exceed the minimum required return:
Average operating assets …………….
$120,000
Net operating income …………………
$10,000
Minimum required return:
15% × $120,000 …………………….
18,000
Residual income ………………………..
$ (8,000)
6 Managerial Accounting for Managers, 4th Edition
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Solutions Manual, Chapter 12 7
Average operating assets ………………….
$2,800,000
Net operating income ……………………….
$ 600,000
Minimum required return:
18% × $2,800,000 ………………………..
504,000
Residual income ……………………………..
$ 96,000
Wait time + Throughput time
14.0 days + 9.0 days
23.0 days
Exercise 12-3 (20 minutes)
1.
Throughput time =
Process time + Inspection time + Move time +
Queue time
=
2.7 days + 0.3 days + 1.0 days + 5.0 days
=
9.0 days
Learning
and
Growth
Internal
Business
Processes
Financial
Customer
Exercise 12-4 (45 minutes)
1. Students’ answers may differ in some details from this solution.
Weekly profit
Weekly sales
Number of
menu items
Dining area
cleanliness
Percentage
of kitchen
staff
completing
cooking
course
+
+
+
+
Customer
satisfaction with
service
Customer
satisfaction with
menu choices
+
+
Average time
to prepare an
order
Average time
to take an
order
Percentage
of dining
room staff
completing
hospitality
course
+
+
–
–
10 Managerial Accounting for Managers, 4th Edition
Exercise 12-4 (continued)
scorecard, the hypotheses are:
o If the percentage of dining room staff that complete the basic
o If the percentage of dining room staff that complete the basic
improve.
o If the percentage of kitchen staff that complete the basic cooking
o If the percentage of kitchen staff that complete the basic cooking
with service will increase.
o If the average time to take an order decreases, then customer
satisfaction with service will increase.
with menu choices will increase.
o If customer satisfaction with service increases, weekly sales will
increase.
o If customer satisfaction with menu choices increases, weekly sales
will increase.
Each of these hypotheses can be questioned. For example, the items
added to the menu may not appeal to customers. So even if the number