Question 1

Roxie, Inc. has used a decentralized form of organizational structure for the past five years. The controller, Ms. Hamburg, has noticed that some of the divisions are still using fixed assets that are fully depreciated and that there has been little acquisition activity in these divisions. Coupled with this are very high ROIs, especially when compared to the other divisions that seem to have a regular program of disposition and replacement of fixed assets.
She takes her concerns and observations to the Financial Vice President who says he will review her findings and look into the problem.
Required:
1) What are the potential negative effects of decentralization?
2) Specifically discuss the issues involved in suboptimization.

Accepted Answer

The answer of Roxie, Inc. has used a decentralized form...

Question 2

The High Seas, Inc. manufactures water vessels and is organized into three large divisions: jet skis, fishing boats, and yachts. The following information presents operating revenues, operating incomes, and invested assets of the company over the last three years:
 $\begin{array}{lrrr}
\text { Operating Revenues }\
\text { (all amounts in } \$ 000 \mathrm{~s}) & 2020 & 2021 & 2022 \
\text { Jet Skis } & \$ 2,000 & \$ 3,000& \$ 4,000 \
\text { Fishing Boats } & 5,000 & 5,000& 4,000 \
\text { Yachts } & 8,000 & 7,000& 8,000\
\
\text { Operating Income }\
\text { Jet Skis } & \$ 500 & \$ 700 & \$ 1,000 \
\text { Fishing Boats } & 3,000 & 2,500 & 2,000 \
\text { Yachts } & 4,000 & 3,000 & 3,500\
\
\text {Invested Assets}\
\text {Jet Skis}&\$1,200&\$1,500&\$2,000\
\text {Fishing Boats}&\$2,000&\$1,500&\$1,5000\
\text {Yachts}&3,000&2,500&3,000
\end{array}$
 
The following table shows the number of managers covered by the current compensation package of The High Seas, Inc.:
 $$\begin{array} { | l | r | r | r | } 
\hline \text { Nurnber of Marnagers } & { 2020 } & 2021 & { 2022 } \
\hline \text { Jet Skis } & 50 & 60 & 70 \
\hline \text { Fishirng Boats } & 200 & 180 & 160 \
\hline \text { Yachts } & 250 & 200 & 250 \
\hline
\end{array}$$ 
The current compensation package is an annual bonus award. The managers share in the bonus pool. The pool is calculated as 10% of the annual residual income of the company. The residual income is defined as operating income minus an interest charge of 14% of invested assets.
Required:
(1) Compute the bonus amount to be paid during each year. Also, compute the (average) individual executive bonus amounts.
(2) If the bonus was calculated by divisional residual income, what would be the bonus amounts?

Accepted Answer

The answer of The High Seas, Inc. manufactures water vessels...

Question 3

Suade Inc. manufactures furniture and is organized into three large divisions: bedroom, living room, and dining room furniture. The following information presents operating revenues, operating incomes and invested assets of the company over the last three years. (all amounts in 000s)
 $\begin{array}{lrr}
  \text {Operating Revenues  } &2020&2021&2022\
 \text { Dining Room } &\$8,000&\$15,000&\$16,000\
 \text { Living Room } &4,500&3,600&2,400\
 \text { Bedroom } &8,800&7,600&6,600\
\
 \text { Operating Income } &\  
\text {Dining Room  } &\$2,500&\$3,100&\$1,800\
 \text { Living Room } &450&900&600\
 \text { Bedroom } &1,200&1,500&1,600\
\
 \text {Invested Assets  } &\
 \text { Dining Room } &\$12,000&\$12,500&\$12,500\
 \text {  Living Room} &2,500&2,400&2,200\
 \text {Bedroom  } &4,500&4,700&4,900\
\end{array}$
 
The following table shows the number of managers covered by the current compensation package of Suade Inc.:
 $$\begin{array} { | l | r | r | r | } 
\hline \text { Number of Managers } & 2020 & 2021 & { 2022 } \
\hline \text { Dirnirng Roorm } & 300 & 350 & 375 \
\hline \text { Living Room } & 40 & 40 & 37 \
\hline \text { Bedroom } & 120 & 140 & 175 \
\hline
\end{array}$$ 
The current compensation package is an annual bonus award. The managers share in the bonus pool. The pool is calculated as 12% of the annual residual income of the company. The residual income is defined as operating income minus an interest charge of 15% of invested assets.
Required:
(1) Use asset turnover, profit margin ratio, and ROI to explain the differences in profitability of the three divisions.
(2) Compute the bonus amount to be paid during each year. Also, compute the (average) individual executive bonus amounts.
(3) If the bonus was calculated by divisional residual income what would be the bonus amounts?
(4) Discuss the benefits and problems of basing the bonus on residual income of a company compared to using divisional residual income.

Accepted Answer

The answer of Suade Inc. manufactures furniture and is organized...

Question 4

Decentralization is lauded as important to good management. But it is not without its problems.
Required:
Identify the advantages and disadvantages of decentralization? How do ROI, Residual Income, and EVA affect these issues?

Accepted Answer

The answer of Decentralization is lauded as important to good...

Question 5

Mallory, Inc. has the following data available for two of its divisions for last year:
 $$\begin{array} { l c r } 
&& \text { Europearn } \
& \text { Asian Division } & \text {Division }  \  
\text { Sales } & \$ 460,000 & \$ 900,000 \
\text { Contribution Margin } & 184,000 & 470,000 \
\text { Operating income } & 92,000 & 90,000 \
\text { Average operating assets } & 368,000 & 750,000 \
\text { Weighted average cost of capital } & 14 \% & 14 \%
\end{array}$$ 
The tax rate for Mallory, Inc. is 18%.
Required:
(1) Compute the following for each division:
(a) Profit margin.
(b) Asset turnover.
(c) ROI.
(d) Residual income.
(e) EVA (assume there are no current liabilities).
(2) Briefly discuss which division appears most successful and why?

Accepted Answer

The answer of Mallory, Inc. has the following data available...

Question 6

Mrs. Young is the manager of the Children's Toy division of Ferguson Corporation. Every year she just misses the cut off established by the company for the awarding of bonuses. She is concerned inasmuch as she believes she is running her division effectively and her income has been increasing slowly but steadily over the years she has been with the company.
She knows that the company uses ROI as the performance measure to evaluate divisions and begins to study the formula to see what she should do to improve the ROI for her division.
Required:
Briefly discuss several ways to improve ROI.

Accepted Answer

The answer of Mrs. Young is the manager of the...

Question 7

Xi, Inc. is just starting up. The management team has decided from the beginning that decentralization was the preferred organizational style and has made this clear in all interviews and discussions with potential employees. Mr. Yang, the CEO, is unsure about the best way to evaluate his division managers. He has heard the terms return on investment, residual income, economic value added, and flexible budgets but wants to know the pros and cons of each.
Required:
Briefly describe ROI, residual income, EVA and other approaches to performance evaluation. Include in your discussion, where appropriate, how to calculate the measure and problem areas in the development of some of the results.

Accepted Answer

The answer of Xi, Inc. is just starting up. The...

Quiz 14: Business Unit Performance Measurement

Decentralization is lauded as important to good management. But it is not without its problems. Required: Identify the advantages and disadvantages of decentralization? How do ROI, Residual Income, and EVA affect these issues?