1. In centralized decision making, decisions are made at the very top level, and lower-level managers
are responsible for implementing these decisions. For decentralized decision making, decisions
are made and implemented by lower-level managers.
2. Decentralization is the delegation of decision-making authority to lower levels.
5. ROI (1) encourages managers to pay attention to the relationships among sales, expenses, and
investment;
(2) encourages cost efficiency; and
(3) discourages excessive investment in operating assets.
Increased profitability can be achieved (all else being equal) by increasing revenues,
decreasing expenses, or lowering investment.
6. Residual income is equal to operating income minus the minimum rate of return multiplied by
7. Yes, residual income and EVA can be negative. This means that the company earned less than
its minimum rate of return or, in the case of EVA, its actual cost of capital.
8.
A
transfer price is the price charged for goods that are transferred from one division to another.
9. One policy is a market price where the transfer price equals the price at which the product would
12
DISCUSSION QUESTIONS
PERFORMANCE EVALUATION
AND DECENTRALIZATION
CHAPTER 12 Performance Evaluation and Decentralization
11. The four perspectives of the Balanced Scorecard are financial, customer, internal business
processes, and learning and growth. The financial perspective describes the economic
consequences of actions taken in the other three perspectives. The customer perspective defines
12-1. a
12-6. c
12-7. a
MULTIPLE-CHOICE QUESTIONS
12-2
CHAPTER 12 Performance Evaluation and Decentralization
CE 12-13
=
4. ROI = Margin × Turnover = 0.08 × 2.50 = 0.20, or 20%
Alternatively,
CE 12-14
1.
1.
Beginning Assets + Ending Assets
2
CORNERSTONE EXERCISES
Average Operating Assets =
=Average Operating Assets
Beginning Assets + Ending Assets
2
=
$1,500,000
$1,600,000 + $1,400,000
2
12-3
CHAPTER 12 Performance Evaluation and Decentralization
CE 12-15
EVA = After-Tax Operating Income – (Actual Percentage Cost of Capital ×
CE 12-16
1. The full cost transfer price is $540. Maple Division would be delighted
2. The market price is $720. Both Maple and Indian divisions would be
3. Minimum Transfer Price = $720 – $120 = $600
This price is set by Indian Division, the selling division.
CE 12-17 (Appendix)
1. Theoretical Cycle Time = 25,000 hours × 60 minutes per hour/250,000 units
= 6 minutes per unit
12-4
CHAPTER 12 Performance Evaluation and Decentralization
CE 12-18 (Appendix)
1. Processing time is equal to theoretical cycle time. That is, if everything goes
smoothly and there is no wasted time, it takes 6 minutes to produce one unit.
Nonprocessing time, therefore, must be the difference between actual cycle
time (which includes some waste) and theoretical cycle time.
12-5
CHAPTER 12 Performance Evaluation and Decentralization
E 12-19
a. Cost center
E 12-20
1. Sales $25,000,000
$7,500,000
$25,000,000
E 12-21
1.
=
3. ROI = Margin × Turnover = 0.15 × 40 = 6.00, or 600%
Alternatively,
4. ROI measures a company’s ability to generate income relative to its
EXERCISES
Margin
Operating Income
Sales
$26,000,000
=Average Operating Assets $28,300,000 + $23,700,000
2
0.30, or 30%
=
=
2.
=
12-6
CHAPTER 12 Performance Evaluation and Decentralization
E 12-21 (Continued)
5. Elway Company might be a service organization with relatively few physical assets
required to generate its sales revenue and income. For example, for many service
organizations, and some manufacturers, one of the most important factors that
E 12-22
1.
Y
ear 1
Y
ear 2
Margin:
2. ROI Year 1 = 0.06 × 0.44 = 0.03, or 3%
ROI Year 2 = 0.05 × 0.40 = 0.02, or 2%
E 12-23
1. Residual Income = $152,250,000 – (0.08 × $2,175,000,000) = –$21,750,000
E 12-24
$8,910,000
$148,500,000
0.06, or 6%
12-7
CHAPTER 12 Performance Evaluation and Decentralization
E 12-25
2. Jefferson Division EVA = $315,000 – (0.12 × $3,250,000) = ($75,000)
3. The Adams Division is creating wealth (i.e., the cost of making the income
4. In essence, Washington’s management can increase Jefferson Division’s EVA
by doing any of the following items:
a. Increase the after-tax operating profit that is generated from using the same
amount of invested capital (i.e., find ways to “do more with the same level of
E 12-26
1. Adams Division Residual Income = $605,000 – (0.08 × $4,000,000) = $285,000
E 12-27
1. The maximum transfer price is set by the buying division, in this case, the Motel
2. Full Cost Transfer Price = $29
3. The Motel Division would love to have a transfer price of $29 per dresser
E 12-28
1. The maximum transfer price, set by the Motel Division, is $40. Remember,
2. The minimum transfer price, set by the Furniture Division, is $40. Remember
that this division is operating at capacity and can sell all that it makes to outside
buyers for $40.
3. If the transfer takes place, the transfer price will be $40. No, it does not matter
E 12-29
1. The maximum transfer price, set by the Motel Division, is $40.
2. The minimum transfer price, set by the Furniture Division, is $14. In this case, only
3. Benefit to Furniture Division:
Revenue ($35 × 10,000) $350,000
Less: Variable cost ($14 × 10,000) 140,000
E 12-30 (Appendix)
1. Theoretical Cycle Time = 10,000 hours × 60 minutes per hour/50,000 units
= 12 minutes per unit
2. Actual Cycle Time = 10,000 hours × 60 minutes per hour/40,000 units
= 15 minutes per unit
E 12-31 (Appendix)
1. Theoretical Cycle Time = 30,000 hours × 60 minutes per hour/90,000 units
= 20 minutes per unit
2. Actual Cycle Time = 30,000 hours × 60 minutes per hour/75,000 units
= 24 minutes per unit
CHAPTER 12 Performance Evaluation and Decentralization
E 12-32 (Appendix)
1. Processing Time = Theoretical Cycle Time = 9 minutes per unit
E 12-33 (Appendix)
1. Processing Time = Theoretical Cycle Time = 10 minutes per unit
12-11
CHAPTER 12 Performance Evaluation and Decentralization
P 12-34
1. a. ROI of Division without Radio = $725,000/$3,625,000 = 0.20, or 20%
b. ROI of the Radio Project = $640,000/$4,000,000 = 0.16, or 16%
2. a. Residual Income of Division without Radio = $725,000 – (0.12 × $3,625,000)
= $290,000
3. This depends on whether Leslie’s division is evaluated on the basis of ROI
or on the basis of residual income. Overall division ROI will decrease; so if
PROBLEMS
CHAPTER 12 Performance Evaluation and Decentralization
P 12-35
1.
Y
ear 1
Y
ear 2
Y
ear 3
ROI………………………………………
…
8.00% 6.97% 6.30%
Margin……………………………………
…
12.00% 11.00% 10.50%
Turnover………………………………… 0.67 0.63 0.60
The ROI increased because expenses decreased and assets turned over at a
higher rate (sales increased).
3. Operating assets: $15,000,000 × 0.80 = $12,000,000
$945,000
$12,000,000
$1,200,000
$12,000,000
=
7.88%ROI:
ROI:
0.10, or 10%4.
=
12-13
CHAPTER 12 Performance Evaluation and Decentralization
P 12-36
1. Air Conditioner ROI = $90,000/$750,000 = 0.12, or 12%
Turbocharger ROI = $82,080/$540,000 = 0.15, or 15%
2. With Air With With Both Neither
Conditioner Turbocharge
r
Investments Investment
Income…………
…
$ 4,425,000 $ 4,417,080 $ 4,507,080 $ 4,335,000
3. The manager will choose turbocharger, but not the air conditioner.
4. a. = $4,425,000 – (0.14 × $29,650,000)
= $274,000
5. a. Residual Income with Air Conditioner = $4,425,000 – (0.10 × $29,650,000)
= $1,460,000
b. Residual Income with Turbocharger = $4,417,080 – (0.10 × $29,440,000)
= $1,473,080
Residual Income with Air Conditioner
12-14
CHAPTER 12 Performance Evaluation and Decentralization
P 12-37
1. $310,000/$3,000,000 = 0.1033, or 10.33%
approve the investment.
0.105, or 10.5%
$3,000,000 + $500,000*
$310,000 + $57,500 =
$310,000 + $57,500
0.0913, or 9.13%
Margin:
$3,450,000 + $575,000 =4.
3.
12-15
CHAPTER 12 Performance Evaluation and Decentralization
P 12-38
1. Lorne should not reduce the price charged to Rosario if he can sell all he produces.
It does not matter whether the two divisions trade internally or not.
3. The transfer price would be $75.60 ($63 × 1.2). No, the transfer would not occur,
since the transfer price is higher than the outside price that Rosario could get.
P 12-39
1. Model SC67 Company
Sales……………………………
…
$260,000 $1,680,000 $1,940,000
2. The transfer price should be the market price of $12. This is the minimum price for
the Components Division and the maximum price for the PSF Division.
3. Unless the PSF Division is able to increase the price of Model SC67, the manager
will discontinue production and will not purchase any of the components. (The
…
Component Y34
12-16
CHAPTER 12 Performance Evaluation and Decentralization
P 12-40
1. Minimum: $26
Maximum: $31
3. New minimum: $27
New maximum: $32
12-17
CHAPTER 12 Performance Evaluation and Decentralization
P 12-41 (Appendix)
$2,700,000
= $135
2. Applied Conversion Cost per Unit = $4.50 × 40 = $180
3. An incentive exists to reduce product cost by reducing cycle time. For example,
current cycle time is 40 minutes per unit. If cycle time could be reduced to 30
P 12-42 (Appendix)
1. a. Customer
b. Internal business process
c. Financial
2. Answers will vary.
Financial—contribution margin by product
P 12-43 (Appendix)
1,000 repairs
500 hours
= 30 minutes
60 minutes per hou
r
2 repairs per hour
1. = 2 per hour
=
=
Theoretical Velocity
Theoretical Cycle Time
12-19
CHAPTER 12 Performance Evaluation and Decentralization
Case 12-44
$1,870,000
$15,600,000
2. Jason is definitely facing an ethical dilemma. While it is true that the sales and
expense projections are estimates, they are the best ones available to him. If
he uses a sales revenue projection from the top end of the range, he will be
deliberately basing the ROI estimate on a highly unlikely sales figure. Sales
3. Jason should prepare the report using the figures he thinks are most descriptive of
the project’s potential. He should feel free to include information about the predicted
1. ROI Based on Initial Estimates =
=
0.1199, or 11.99%
CASES