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Solutions Manual, Chapter 11 1
Chapter 11
Performance Measurement in Decentralized
Organizations
Solutions to Questions
11-2 The benefits of decentralization include:
(1) by delegating day-to-day problem solving to
lower-level managers, top management can
11-3 The manager of a cost center has
control over cost, but not revenue or the use of
investment funds. A profit center manager has
11-4 Margin is the ratio of net operating
income to total sales. Turnover is the ratio of
11-5 Residual income is the net operating
income an investment center earns above the
a manager of an investment center may reject a
profitable investment opportunity whose rate of
return exceeds the company’s required rate of
return but whose rate of return is less than the
11-8 An MCE of less than 1 means that the
production process includes non-value-added
time. An MCE of 0.40, for example, means that
11-9 A company’s balanced scorecard should
be derived from and support its strategy.
11-10 The balanced scorecard is constructed
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2 Managerial Accounting, 16th Edition
theory about what actions will further the
company’s goals. Assuming that the company
scorecard as a check on the reality of the theory.
If the internal business processes improve, but
the financial outcomes do not improve, the
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Solutions Manual, Chapter 11 3
Chapter 11: Applying Excel
The completed worksheet is shown below.
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4 Managerial Accounting, 16th Edition
Chapter 11: Applying Excel (continued)
The completed worksheet, with formulas displayed, is shown below.
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Solutions Manual, Chapter 11 5
Chapter 11: Applying Excel (continued)
1. With the changes in average operating assets, the result is:
An increase in average operating assets will increase both the ROI and
residual income.
ROI = Net operating income/Average operating assets
ROI increases because average operating assets is in the denominator
of ROI. Residual income increases when average operating assets
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6 Managerial Accounting, 16th Edition
Chapter 11: Applying Excel (continued)
2. With the revised data, the worksheet should look like this:
b. As shown above, the residual income is $(3).
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Solutions Manual, Chapter 11 7
The Foundational 15
1. Last year’s margin is:
Net operating income
Margin = Sales
2. Last year’s turnover is:
Sales
Turnover =
A
vera
g
e operatin
g
assets
3. Last year’s return on investment (ROI) is:
ROI = Margin × Turnover
4. The margin for this year’s investment opportunity is:
Net operating income
Margin = Sales
5. The turnover for this year’s investment opportunity is:
Sales
Turnover =
A
vera
g
e operatin
g
assets
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8 Managerial Accounting, 16th Edition
The Foundational 15 (continued)
6. The ROI for this year’s investment opportunity is:
ROI = Margin × Turnover
7, 8, and 9.
If the company pursues the investment opportunity, this year’s margin,
turnover, and ROI would be:
Net operatin
g
income
Margin = Sales
Sales
Turnover = Average operating assets
ROI = Margin × Turnover
10. The CEO would not pursue the investment opportunity because it
lowers her ROI from 32% to 30.9%. The owners of the company
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Solutions Manual, Chapter 11 9
The Foundational 15 (continued)
11. Last year’s residual income is:
A
vera
g
e operatin
g
assets …………… $625,000
12. The residual income for this year’s investment opportunity is:
A
vera
g
e operatin
g
assets …………… $120,000
13. If the company pursues the investment opportunity, this year’s
residual income will be:
A
vera
g
e operatin
g
assets …………… $745,000
14. The CEO would pursue the investment opportunity because it would
15. The CEO and the company would not want to pursue this investment
opportunity because it does not exceed the minimum required return:
A
vera
g
e operatin
g
assets …………… $120,000
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10 Managerial Accounting, 16th Edition
Exercise 11-1 (10 minutes)
1. Net operating income
Margin = Sales
2. Sales
Turnover =
A
verage operating assets
3. ROI = Margin × Turnover