Exercise 9-11 (30 minutes)
1.
Net operating income
Margin = Sales
2.
Net operating income
Margin = Sales
Sales
Turnover = Average operating assets
Exercise 9-11 (continued)
3.
Net operating income
Margin = Sales
$70,000 + $14,000
=
$1,400,000
$84,000
= = 6%
$1,400,000
4.
Net operating income
Margin =
Sales
$70,000
= = 5%
$1,400,000
Exercise 9-12 (30 minutes)
1. ROI computations:
Net operating income Sales
ROI = ×
Sales Average operating assets
2.
Division A
Division B
Division C
Average operating assets ………
$3,000,000
$7,000,000
$5,000,000
Required rate of return………….
× 14%
× 10%
× 16%
Required operating income …….
$ 420,000
Actual operating income ………..
$ 600,000
$ 560,000
Residual income ………………….
Exercise 9-12 (continued)
3. a. and b.
Division A
Division B
Division C
Return on investment (ROI) ………..
20%
8%
16%
Therefore, if the division is
presented with an investment
If performance is being measured by ROI, both Division A and Division C
probably would reject the 15% investment opportunity. These divisions’
ROIs currently exceed 15%; accepting a new investment with a 15%
rate of return would reduce their overall ROIs. Division B probably would
accept the 15% investment opportunity because accepting it would
Exercise 9-13 (15 minutes)
1.
Net operating income
Margin = Sales
2.
Net operating income
Margin = Sales
$150,000(1.00 + 2.00)
=
$3,000,000(1.00 + 0.50)
Exercise 9-13 (continued)
3.
Net operating income
Margin = Sales
Sales
Turnover = Average operating assets
Problem 9-14A (30 minutes)
1. a., b., and c.
Month
1
2
3
4
Throughput time—days:
Process time (x) …………………………...
2.1
2.0
1.9
1.8
Inspection time …………………………….
0.6
0.7
0.7
0.6
Move time …………………………………..
0.4
0.3
0.4
0.4
Queue time …………………………………
4.3
5.0
5.8
6.7
Manufacturing cycle efficiency (MCE):
Total delivery cycle time …………………
2. All of the performance measures display unfavorable trends. Throughput
time per unit is increasing—largely because of an increase in queue
Problem 9-14A (continued)
3. a. and b.
Month
5
6
Throughput time—days:
Process time (x) ……………………………………….
1.8
1.8
Inspection time ………………………………………..
0.6
0.0
Move time ………………………………………………
0.4
0.4
Queue time …………………………………………….
0.0
0.0
Manufacturing cycle efficiency (MCE):
Problem 9-15A (20 minutes)
1. Operating assets do not include investments in other companies or in
undeveloped land.
Beginning
Balances
Ending
Balances
Cash …………………………………………….
$ 140,000
$ 120,000
Accounts receivable …………………………
Inventory ………………………………………
2.
Net operating income ……………………………………
$405,000
Problem 9-16A (45 minutes)
1. MPC’s previous manufacturing strategy was focused on high–volume
production of a limited range of paper grades. The goal of this strategy
was to keep the machines running constantly to maximize the number
of tons produced. Changeovers were avoided because they lowered
2. Employees focus on improving those measures that are used to evaluate
their performance. Therefore, strategically-aligned performance
measures will channel employee effort towards improving those aspects
of performance that are most important to obtaining strategic
Problem 9-16A (continued)
3. Students’ answers may differ in some details from this solution.
Number of new
Average
Sales
Contribution
margin per ton
Financial
Number of different
paper grades produced
Internal
Business
Processes
+
+
+
Problem 9-16A (continued)
4. The hypotheses underlying the balanced scorecard are indicated by the
arrows in the diagram. Reading from the bottom of the balanced
scorecard, the hypotheses are:
° If the number of employees trained to support the flexibility strategy
increases, then the average changeover time will decrease and the
increase.
° If the customer satisfaction with breadth of product offerings
increases, then the number of new customers acquired, sales, and
the contribution margin per ton will increase.
° If the number of new customers acquired increases, then sales will
Problem 9-17A (30 minutes)
1. Breaking the ROI computation into two separate elements reveals
important relationships that otherwise might remain hidden. First, the
importance of asset turnover as a key element to overall profitability is
2. The missing information is as follows:
Companies in the Same Industry
A
B
C
Sales ………………………………
$600,000
*
$500,000
*
$2,000,000
Margin …………………………….
*
Turnover ………………………….
*
Return on investment (ROI) …
*
*Given.
NAA Report No. 35
states (p. 35):
“Introducing sales to measure level of operations helps to disclose
specific areas for more intensive investigation. Company B does as well
as Company A in terms of profit margin, for both companies earn 14%
Problem 9-17A (continued)
Thus, by including sales specifically in ROI computations the manager is
able to discover possible problems, as well as reasons underlying a
strong or a weak performance. Looking at Company A compared to
Company C, notice that C’s turnover is the same as A’s, but C’s margin
on sales is much lower. Why would C have such a low margin? Is it due
Problem 9-18A (30 minutes)
1.
Present
New Line
Total
(1)
Sales ……………………..
$10,000,000
$2,000,000
$12,000,000
(2)
Net operating income ..
$800,000
$160,000
*
$960,000
Operating assets ………
$1,000,000
Margin (2) ÷ (1) ………
Turnover (1) ÷ (3) ……
ROI (4) × (5) …………..
*
Sales ………………………………………………….
$2,000,000
Variable expenses (60% × $2,000,000) …….
1,200,000
Contribution margin ………………………………
Fixed expenses …………………………………….
Net operating income …………………………….
2. Dell Havasi will be inclined to reject the new product line because
accepting it would reduce his division’s overall rate of return.
3. The new product line promises an ROI of 16%, whereas the company’s
4.
a.
Present
New Line
Total
Operating assets ………………..
$4,000,000
$1,000,000
$5,000,000
Minimum return required ……..
× 12%
× 12%
× 12%
Actual net operating income …
Minimum net operating
480,000
120,000
600,000
Residual income …………………
Minimum net operating
Problem 9-19A (30 minutes)
1. a., b., and c.
Month
1
2
3
4
Throughput time in days:
Manufacturing cycle efficiency (MCE):
2. a. Areas where the company is improving:
Quality control.
The number of defects has decreased by over 50% in
the last four months. Moreover, both warranty claims and customer
Problem 9-19A (continued)
b. Areas of deterioration:
Material control.
Scrap as a percentage of total cost has tripled over
the last four months.
3. a. and b.
Month
5
6
Throughput time in days:
Process time ……………………………………
1.8
1.8
Queue time during production …………….
0.0
0.0
Total throughput time ………………………..
3.0
2.3
Manufacturing cycle efficiency (MCE):
Process time ÷ Throughput time ………….
Problem 9-20A (30 minutes)
1.
Net operating income Sales
ROI = ×
Sales Average operating assets
3.
$392,000 $4,000,000
ROI = ×
$4,000,000 $2,000,000
= 9.8% × 2 = 19.6%
(Increase) (Unchanged) (Increase)
Problem 9-20A (continued)
5. The company has a contribution margin ratio of 30% ($24 CM per unit,
divided by the $80 selling price per unit). Therefore, a 20% increase in
sales would result in a new net operating income of:
Sales (1.20 × $4,000,000) …..
$4,800,000
100
%
Variable expenses ………………
Contribution margin ……………
%
Fixed expenses ………………….
6.
$320,000 $4,000,000
ROI = ×
$4,000,000 $1,960,000
= 8% × 2.04 = 16.3%
(Decrease) (Increase) (Decrease)
Problem 9-21A (90 minutes)
1. Both companies view training as important; both companies need to
leverage technology to succeed in the marketplace; and both companies
are concerned with minimizing defects. There are numerous differences
between the two companies. For example, Applied Pharmaceuticals is a