Question & Answer

            EVA for segments

Following is information for the Fulcrum Company’s three business segments located in Europe.

Fulcrum’s applicable tax rate for the segments is 30 per cent, and its weighted average cost of capital for each segment is 10 per cent.

Required

Determine the segment with the highest EVA.

            ROI; residual income; breakeven point; contribution margin

Mirror Industries laminating division, BrightShine, incurred the following costs and expenses in the last period.

During the period, BrightShine produced 300 000 units of industrial photo prints, which were sold for $2 each. Mirrors’s investment in BrightShine was $500 000 and $700 000 at the beginning and ending of the year, respectively. BrightShine’s weighted average cost of capital is 15 per cent.

Required

(a)        Determine BrightShine’s return on investment for the year.

(b)        Compute BrightShine’s residual income (loss) for the year.

(c)        How many industrial photo print units did BrightShine have to sell during the year to break even?

(d)        What was BrightShine’s contribution margin for the year?

  Residual income; ROI; EVA

The following selected data pertain to Garfield Landscaping for last year.

Required

(a)           Calculate the residual income.

(b)           Calculate the return on investment.

(c)           Calculate the economic value added.

At a recent management meeting at Skyward Industries, the Transport Division manager was heard to say “this transfer pricing is a waste of time – at the end of the year all the internal transactions are eliminated on consolidation in the financial reports”.  Comment on this statement.

            Why do you consider that taxation authorities require an international             transfer price to be set based on an arm’s length transaction?

'Transfer pricing is a waste of an entity’s resources; it all gets eliminated          on consolidation'. Discuss

            Cost allocation has no impact on the transfer price set.  Discuss.

            Describe as many different methods for setting transfer prices as you can.

            Suppose transfer prices are set at market prices and a manager who previously purchased internally begins to purchase externally. Explain what it means to say that the outsourcing decision might have been suboptimal.

An organisation’s plant in Queensland manufactures a product that is shipped to a branch in Tasmania for sale. Does it make any difference which branch (each is a profit centre) is charged for the cost of transportation? Explain.

            Explain how EVA differs from residual income.

Explain why the use of residual income for performance evaluation provides better incentives, in some ways, than ROI, but still causes managers to make some decisions that could be harmful to an organisation in the long run.

Explain how residual income is calculated, and define required rate of return in your own words.

            Explain how and why the use of ROI for performance evaluation can cause managers to make decisions that could be harmful to an entity in the long run.

Explain how return on investment (ROI) is calculated and how it can be         decomposed into two financial measures.

            A national company, Fast Print, decided to expand into several developing countries. The company has been managed under a centralised organisational form, but is considering changing to a decentralised form. List the advantages and disadvantages of making this change.

Identify the four different types of responsibility centres and explain the general objectives of each.

Explain why organisational form may vary if specific knowledge versus general knowledge is needed for decision making.

            Explain the differences between general and specific knowledge. Give an example of an industry where knowledge is quite general and an example of an industry that requires specific knowledge.

            Strategies and balanced scorecard measures for a country

Brian Henshall, Foundation Emeritus Professor of Management at The University of Auckland, suggests a number of potential performance measures that could be used to monitor performance for the country of New Zealand. Henshall recommends that the measures be published monthly to gauge progress. He also argues that a discussion of potential performance measures would help citizens define what they want. Ultimately, the measures could be used to monitor the performance of elected officials. Following are some of Henshall’s suggestions.

Tangible wealth:

·       gross domestic product (GDP) percentage change as a measure of growth

·       the ratio of government wealth creation to business wealth creation as a measure of government economic performance

·       GDP per person employed and per total number of people in New Zealand as efficiency measures

·       New Zealand dollar exchange rate (percentage change for last quarter or last year) as a measure of economic stability

·       number of bankrupt firms to all trading entities as a measure of business stability

Environmental intangible wealth:

·       a pollution index that measures degradation of the environment from pollution

·       a ratio of protected land relative to total government-owned land

·       a ratio of alternative energy resources relative to total energy produced Physical and social infrastructure:

·       educational expense as a percentage of GDP

·       health care expense as a percentage of GDP

·       accidents index

·       serious crimes index

Demographics:

·       changes in population growth, year to year

·       growth in education levels

·       a demographic index that monitors innovations by diversity of peoples

·       unemployment rates

Source: Information from Henshall, BD 2002, ‘Kiwi Scorecard,’ New Zealand Management, July 2002, pp. 15 ff.

Required

(a)     Suppose government officials developed an objective to increase the number of college graduates because they believe increased education will lead to increased GDP. Brainstorm and identify several ideas for action plans to carry out this strategy.

(b)     Pick one of your ideas from part (a) and discuss its pros and cons.

(c)     Brainstorm ideas for action plans to increase the number of high school graduates.

(d)     Pick one of your ideas from part (c) and discuss its pros and cons.

 Evaluate balanced scorecard design

            Frieda’s Fizz brews specialty soft drinks, including root beer and other flavours. Its vision is 'To proudly produce and sell extraordinarily smooth, rich, and delicious soft drinks to satisfy kids of all ages.' The entity has a reputation for high quality and unique flavour, enabling it to sell soft drinks at a premium price to gourmet grocery stores in the local area. The entity’s managers plan to expand the business to other geographic regions, but they want to ensure that they maintain high quality as the entity grows. They have decided to implement a balanced scorecard, and they have chosen the following balanced scorecard measures:

Financial Perspective

1.       Breakdown of manufacturing cost per case: ingredients, direct labour, packaging materials, and overhead

2.       Operating profit per case

3.       Return on investment

         Customer Perspective

4.       Number of customer complaints relating to taste, freshness, package integrity, appearance, and foreign objects

5.       Quality index (an internal measure of manufacturing quality, including microbiology and chemistry)

6.       Percentage sales growth

         Internal Business Process Perspective

7.       Ratio of plant production hours to total available time

8.       Throughput (number of cases packaged)

9.       Waste and scrap as a percent of total production cost

         Learning and Growth Perspective

10.     Number of work-related injuries

11.     Number of training hours per employee

12.     Number of community volunteer hours per employee

Required

 (a)    Explain why uncertainties exist about the best balanced scorecard measures for Frieda’s Fizz. (Do not discuss any of the measures already listed. Instead, focus on why any set of measures might not provide ideal information and on why the managers cannot know with certainty which set of measures is best.)

(b)     For the balanced scorecard perspective:

                                              (i)          Describe the strengths and weaknesses of the measures chosen for that category.

                                            (ii)          Reach a conclusion about the reasonableness of the set of balanced scorecard measures for that category.

(c)     What are the pros and cons of implementing a balanced scorecard?

(d)     How valuable do you think the balanced scorecard will be in helping the managers of Frieda’s Fizz meet its vision? Explain.

(e)     The managers of Frieda’s Fizz want your evaluation of their proposed balanced scorecard. Use the information you learned from the preceding analyses to write a memo to the managers presenting your evaluation of

                                              (i)          whether they should adopt a balanced scorecard

                                            (ii)          the proposed balanced scorecard design.

Balanced scorecard variances

A large supermarket has used a balanced scorecard for several years. The store’s vision is to provide customers with low-cost goods and a high-quality shopping experience. The entity’s strategy has been to focus on reducing wait time for help on the floor and at the checkout counter. Information for the last two years follows.

Required

(a)     Classify each performance measure according to one of the four balanced scorecard perspectives.

(b)     Analyse the change in each performance measure from 2019 to 2024. Give one possible reason for the change.

(c)     Which performance measures need further investigation? Explain.

(d)     What do the balanced scorecard results suggest about the success of the entity’s strategy to reduce wait time? Explain.

(e)     When an organisation focuses on one strategy, problems sometimes arise in other areas. Do the balanced scorecard results provide evidence of possible deterioration in any operational areas? Explain.

            Strategy, balanced scorecard for organisation and employee

Mark Hopper owns Dane Champions, a dog kennel that raises champion Great Danes for showing and breeding. His vision is to be the best-known breeder of Great Danes globally. His strategy is to breed and sell dogs from outstanding lineage from the standpoint of both physical health and good-natured temperaments. Following is information about operations over the last year.

Required

(a)     Is the entity’s strategy one of cost leadership or product differentiation? Explain.

(b)  (i)  Prepare a simple balanced scorecard with one performance measure for            each of the four perspectives for Dane Champions using only the data           presented. Explain your choices

          (ii)  Explain how these measures are linked.

(c)     Kennel operating costs include the cost of a local high school student who cleans out the kennels every afternoon after school. Mark is considering whether to set up an individual scorecard for the student. He only pays minimum wage, and although the student is fairly slow, the kennels are kept reasonably clean. Mark wonders whether the student would resent being monitored more closely. Describe one reason for using a scorecard with the student and one reason against using it.

Balanced scorecard; strengths and weaknesses

Brewster House is a not-for-profit shelter for the homeless. Lately funding has decreased, but the demand for overnight shelter has increased. In cold weather, clients are turned away because the shelter is full. The director believes that the current capacity could be used more efficiently. No one has taken time to analyse the physical layout of the shelter and current use of space. Several rooms are used for storage that could probably be used for temporary housing. The stored boxes need to be sorted and moved. Volunteers currently assign beds and manage overnight housing, because the director is busy with fund-raising. Volunteers work just a few shifts each week, so no one has taken responsibility for coordinating improvements in the services offered. The director is considering whether to implement a balanced scorecard to focus the attention of all volunteers on areas that need improvement.

Brewster receives funds from several sources including a set annual budget from the council and direct donations from supporters. The director develops a budget each year based on expected funding, but she cannot precisely predict donations. The budget is used primarily to justify funding requests submitted to the council.

The director has asked a group of accounting students from the local university to evaluate operations and recommend whether the organisation should develop a balanced scorecard. She cannot give bonuses based on the measures, but she wonders whether developing and monitoring performance measures would encourage the volunteers to increase the use of capacity. She also wonders whether some information from the balanced scorecard could be used to show donors the effectiveness of operations.

Required

(a)     Describe several potential costs and benefits of the balanced scorecard for this organisation.

(b)     Describe one potential measure for each scorecard perspective appropriate for Brewster House. Explain how information for each measure will be collected.

(c)     Prepare a memo to the director that recommends whether Brewster House should adopt a balanced scorecard. In writing the memo, consider what information the director needs from you to help her make a decision.

            Participative strategic planning process and benefits, manager behavior

(This problem assumes knowledge from management classes) Quantum Computers produces and sells laptop computers. The entity is currently deciding whether to continue concentrating on the laptop computer market or to expand by entering the highly competitive computer desktop workstation market.

Most of the management staff has been with Quantum for a long time. Michael Mitchem, Quantum’s president, wants his management staff to assist him in Quantum’s strategic planning process. Mitchem has scheduled a three-day offsite meeting for the management staff to join together for the entity’s strategic planning process.

Required

(a)     What functional areas should be discussed during the strategic planning process?

(b)     Identify at least six factors to be considered in a thorough strategic planning process that will move a company such as Quantum to another level of product development.

(c)     Identify at least three benefits that Quantum can derive from a participatory strategic planning process.

(d)     Discuss the expected behavior of the managers at Quantum who participate in the three-day offsite strategic planning meeting.