United Mexico and United
States Canada States
United Mexico and United
States Canada States
$ 499,660 $ 46,325 $ 487,185
$ 821,335 $ 25,402 $ 832,260
$ 55,074 $ 1,200 $ 42,554
$ 1,399
$ 25,740
Mexico and
Canada
Year 1
Mexico and
Canada
Year 2
Both U.S. assets and net foreign assets decreased. This could be a result of foreign exchange
fluctuations and/or the result of increased accumulated depreciation. Also, earnings increased
between year 1 and year 2 for the U.S. operations, but decreased slightly for the foreign
subsidiaries, as the following table shows (dollar amounts are in 000s):
Year 2
Year 1
PROBLEM 25.4A
20 Minutes, Medium
TOOTSIE ROLL INDUSTRIES
The DuPont method of analysis provides the following results (dollar amounts are in 000s):
Sales
$ 41,184
A-3 – 2
A-4 – 4
A-5 – 5
A-2 – 1
40 Minutes, Medium
FASTWHERE INC.
A-4. However A-5 would not be acceptable.
Project A-5 has a negative residual income as follows:
PROJECT – rank
The ranking for ROI showed project A-1 preferred over A-3. However, the ranking for
For ROI the ranking would be A-2 –1st, A-1 –2nd, A-3 –3rd, A-4 –4th and A-5 –5th.
However, all but the first two would be unacceptable. For Residual income, the following
would be the ranking:
A-1 – 3
PROBLEM 25.6A
VALANCE AUTOPARTS
TO: Plant Manager
FROM: Consultants Incorporated
RE: Balanced Scorecard Problems in the Assembly Department
•
•
•
40 Minutes, Medium
The following problems have been observed in the Assembly Department and recorded from
our conversations with Ms. Joyce Biginskor, supervisor of the Assembly Department.
MEMO
There are too many measures being used for a relatively minor department of the plant. As
a result, there is confusion about what to focus on and which of the measures are important
to achieve the goals.
efficient and productive can sometimes be in conflict with employee satisfaction measures.
The supervisor does not have control over all the inputs to the chosen measures. For
example, cycle time and number of defects are affected by the quality of the supplies
purchased for assembly. The purchasing department controls the quality of supplies
purchased.
Technical difficulties exist with measuring cost of rework and productivity per employee.
When employees have sick days and time off for union activities, employee productivity
declines.
15 Minutes, Easy
PROBLEM 25.7A
MANAGEMENT COMPENSATION
HINKLEY CORPORATION
Base Salaries: These are fixed incentives. Also these are local, because the amount is based on
the specific job.
Annual Bonus: These are short-term incentives that are fixed in nature. These incentives can
be competitive if the total bonus pool is a fixed pie. These are accounting based incentives and
20 Minutes, Medium PROBLEM 25.8A
HOPENSTAT INCORPORATED
a.
Assuming sales revenue does not change, then net income is higher because of the lower
R&D expenses and both ROI and residual income increase. Capital turnover does not
change.
30 Minutes, Medium
PROBLEM 25.9A
MARFAR INDUSTRIES
1. a.
3.
Bent Press is being evaluated as an investment center. Thus, management of Bent Press
Average investment base = (beginning of year base + end of year base) ÷ 2. Beginning
of year × 1.06 (6% increase) = end of year = $14,310,000. Thus, beg. year =
SOLUTIONS TO PROBLEMS SET B
a.
ROI Return on Sales Capital Turnover
$2,000,000÷$10,000,000 $2,000,000÷$16,000,000 $16,000,000÷$10,000,000
= 20% = 12.5% = 160%
PROBLEM 25.1B
60 Minutes, Strong
TRIPLE CREEK GOLF COMPLEX
Triple Creek Golf Complex
Departments
Golf Courses
Return on sales is lower for the Golf Courses reflecting the high operating costs associated maintaining the grounds. In
addition, the capital turnover for golf operations is high compared to the other departments because the restaurants and
pro shops have much higher investment bases relative to their sales revenue.
c.
Residual income (loss) for the departments are:
= 25% = 40% = 62.5%
= 30% = 60% = 50%
Pro Shops
Cleanliness
Time spent keeping stock
neatly organized and fully
stocked
Change in satisfaction per
hour of staff time.
Customer beliefs are key to
measurement:
To improve the reputation of the
Pro Shops:
Use surveys and resources
consumed to provide feedback:
30 Minutes, Medium
a. GOALS
b. MEASUREMENTS
and RESOURCES
PROBLEM 25.2B
c. FEEDBACK
Choosing to use only residual income suffers from many of the same problems as using ROI.
That is, the manager for the Pro Shops Department will want to reduce operating expenses to
improve operating earnings. Thus the manager will still try to skimp on the staff wages.
Assuming that a strategic goal of the Complex is to maintain a good reputation by having high
customer satisfaction, then a balanced scorecard approach to business performance
measurement is preferred. In particular, for the Pro Shops Department consider the following:
TRIPLE CREEK GOLF COMPLEX
Change in satisfaction per
dollar of sales.
Investment in bonus for top
Change in satisfaction per
dollar inventory.
Surveys of customer
Change in satisfaction per
b.
•
ROI will motivate managers to use the minimum amount of invested capital to earn the
•
The manager’s bonus is computed as follows:
PROBLEM 25.3B
WILSON COMPANY
30 Minutes, Medium
a.
The Toy Division’s ROI and residual income (RI) are computed as follows:
c.
Disadvantages:
It forces managers to focus on the short-term success of a company, instead of the long-
Advantages:
Bonus Percentage ……………………………………………………………………………
Residual Income (part a) ………………………………………………………………………
Less: Portion excluded from bonus computation ……………………………………….
Amount for bonus computation ………………………………………………………….
United Mexico and United
States Canada States
$ 460,580 $ 39,250 $ 450,440
PROBLEM 25.4B
20 Minutes, Medium
TOOTSIE ROLL INDUSTRIES
AT TOOTSIE ROLL
The capital turnover ratio decreased dramatically for the Mexico/Canada division between year
Sales
Year 2
Year 1
Mexico and
Canada
$ 32,860
795,600 24,900 720,500
49,300 1,350 46,200
620
4,100
PROBLEM 25.5B
a.
d.
Operating Income Residual Income
$200,000 × 16.2% = $32,400 $32,400 – ($200,000 × 12%) = $8,400
e.
The two components of ROI are capital turnover (CT) and return on sales (ROS). CT is
useful in assessing how effectively a company is using its invested capital to generate sales
For ROI the ranking would be A through E as displayed in the table; however, Projects C,
D, and E would be unacceptable to Jan because they earn less than the current required
15% ROI. For Residual income, the following would be the ranking:
A – 2
PROJECT – rank
40 Minutes, Medium
SAVE SOME INCORPORATED
Any project with an ROI of 15% or better would be attractive to Jan and would improve
the ROI of Jan’s location. Thus, only project A would improve Jan’s ROI.
b.
All projects with an ROI above the minimum required return established for Save Some of
PROBLEM 25.6B
EATWELL
TO: Eatwell Corporate Management
FROM: Knowitall Incorporated
RE: Balanced Scorecard Problems in the Eatwell Restaurant Chain
40 Minutes, Strong
The following problems have been observed in the Restaurants and recorded from our
conversations with Ms. Sandra Olson, supervisor of the Restaurant.
MEMO
There are too many measures being used for relatively minor areas of the restaurants, for
example the kitchen. As a result, there is confusion about what to focus on and which of the
measures are important to achieve the restaurant’s goals.
We suggest that you choose one or at most two measures for each category of the balanced
scorecard for the Restaurants. These measures should be relatively easy to measure and should
measure important components of the business performance necessary to achieve the company’s
Restaurant managers do not have control over all the inputs to the chosen measures. For
example, the number of spoiled dinners and time from order placement to completion are
affected by the quality of the produce, meats and groceries purchased. The purchasing
manager controls the quality of supplies purchased.
15 Minutes, Easy
PROBLEM 25.7B
MANAGEMENT COMPENSATION
BRONSON CORPORATION
Base Salary:
The base salary is primarily driven by labor market concerns. Making sure that the top
The general executive compensation policy mentions both short-term and long-term
orientation. The compensation program includes both a base salary and other annual incentive
bonuses:
20 Minutes, Medium PROBLEM 25.8B
FRANGLING INTERNATIONAL
b.
c.
Writing-off bad debts has no effect on net income or on the total investment in assets (i.e.,
Again, both ROI and residual income are reduced because the increased salary expense
30 Minutes, Medium
PROBLEM 25.9B
WARTHERS CORPORATION
3.
The current compensation is annual in nature (short term), relies on a bonus based on
accounting numbers, and appears to be fixed. It also focuses on local, at the division level,
SOLUTIONS TO CRITICAL THINKING CASES
CASE 25.1
BUSINESS PERFORMANCE
AND TRANSFER PRICES
b.
Note to instructor: There is no “right answer” related to what should be done. It would be
30 Minutes, Medium
d.
You have suggested that transfer prices should reflect market prices rather than cost. Had
this policy been in effect last year, the residual income of the Printer Division would have
decide if some corrective action is necessary.
Both statements are correct. Selling the printers for $300 each is more profitable than
c.
The problem lies in using cost as a transfer price for the output of a profit center. If
market value were used as the transfer price, it would be as profitable for the Printer
Division to supply printers to Mail-Order as to sell them to outsiders. This should
20 Minutes, Medium
CASE 25.2
BIG BERTHA SUB SHOPS
a. ROI prior to and after menu change to include toasted subs:
1) Prior to Toasted Subs: Cleveland
Sales $880,400
Expenses 739,536
Operating Profit $140,864
b.
1) Prior to Toasted Subs: Cleveland
Operating Profit $140,864
Less 15% x assets ( 135,000)
2) Toasted Sub:
Less 15% x assets ( 29,250)
3) After Toasted Subs:
Operating Profit $174,464
Less 15% x assets ( 164,250)
c.
Residual Income
If the two sub shop managers of the two locations are evaluated on ROI by the Big Bertha
Shops management, then those managers will consider the impact of the menu change on
÷ Capital Invested in Assets $900,000
2) Toasted Sub ROI:
÷ Capital Invested in Assets 195,000
3) After Toasted Subs:
Operating Profit $174,464
÷ Capital Invested in Assets 1,095,000
CASE 25.3
STERN STEWART & COMPANY
INTERNET
•Setting Organizational Goals
30 Minutes, Medium
EVA can be used for the following purposes
Capital Budgeting
Corporate Valuations
Determining Bonuses
Communications with Shareholders and investors
Analyzing Equity Securities
Motivating Managers