Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 34

Evaluate Trade-Offs in Return Measurement

Oscar Clemente (Problem 14-33) is still assessing the problem of whether to acquire LSI’s assembly machine. He learns that the new machine could be acquired next year, but if he waits until then, it will cost 15 percent more. The salvage value would still be $500,000. Other costs or revenue estimates would be apportioned on a month-by-month basis for the time each machine (either the current machine or the machine Oscar is considering) is in use. Fractions of months may be ignored. Ignore taxes.

Required

a. When would Oscar want to purchase the new machine if he waits until next year?

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b. What are the costs that must be considered in making this decision?

Step 1 of 3

Divisional performance management

Performance measures are developed to assess the divisional performance. Performance measures should be consistent with authority granted and performance measures should assess the effectiveness of actions. Company should also consider those actions of divisional managers that improve the divisional performance but are unfavorable to organization performance. Divisions are assessed on income earned because divisions have revenue and cost both.

Return on investment

Return on income is used as a measure to the divisional performance. This a ratio that indicates relationship between two variables i.e. income after tax and divisional assets. It may be calculated by multiplying two ratios i.e. profit margin ratio and asset turnover.

Return on investment is calculated by dividing the income after tax with the amount of divisional assets.