Managerial Accounting

Business

Quiz 11 :

Performance Measurement in Decentralized Organizations

Quiz 11 :

Performance Measurement in Decentralized Organizations

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What does a manufacturing cycle efficiency (MCE) of less than 1 mean How would you interpret an MCE of 0.40
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An MCE of less than 1 indicates non-value-added time in the production process. An MCE of 0.40 means that 40% of throughput time consists of actual processing, and the other 60% consists of moving, inspection, and other non-value-added activities.

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Evaluating New Investments Using Return on Investment (ROI) and Residual Income [LOl, L02] Selected sales and operating data for three divisions of three different companies are given below: img Required: 1. Compute the return on investment (ROI) for each division, using the formula stated in terms of margin and turnover. 2. Compute the residual income for each division. 3. Assume that each division is presented with an investment opportunity that would yield a rate of return of 17%. a. If performance is being measured by ROI. which division or divisions will probably accept the opportunity Reject Why b. If performance is being measured by residual income, which division or divisions will probably accept the opportunity Reject Why
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1)ROI may be calculated as:
img Division A:
img Division B:
img Division C:
img 2)Residual Income May be calculated as:
img Division A:
img Division B:
img Division C:
img 3a)As long as the division yielded an ROI greater than 17% the division will probably accept the opportunity. Therefore, both Division A and Division B would reject the opportunity and Division C would accept the opportunity. Acceptance will increase Division C's overall rate of return.
3b)As long as the minimum required rate of return to compute residual income is higher than the return from the opportunity, a division would accept the opportunity. Therefore, both Divisions A and C will accept the opportunity while Division B rejects the opportunity.

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Measures of Internal Business Process Performance [L03] Lipex. Ltd., of Birmingham, England, is interested in cutting the amount of time between when a customer places an order and when the order is completed. For the first quarter of the year, the following data were reported: img Required: 1. Compute the throughput time. 2. Compute the manufacturing cycle efficiency (MCE) for the quarter. 3. What percentage of the throughput time was spent in non-value-added activities 4. Compute the delivery cycle time. 5. If by using Lean Production all queue time can be eliminated in production, what will be the new MCE
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1)Throughput time is calculated as follows:
img 2)Keep in mind only process time is value-added time. Therefore the manufacturing cycle efficiency (MCE) can be calculated as:
img 3)Since the MCE is 35%, then 35% of throughput time was spent in value-added activities, and the other 65% was spent in non-value-added activities.
4)The formula is:
img 5)If queue time is eliminated, then the throughput time reduces by 4 days. The MCE is now calculated as:
img

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Effects of Changes in Sales, Expenses, and Assets on ROI [LOl] BusServ.com Corporation provides business-to-business services on the Internet. Data concerning the most recent year appear below: img Required: Consider each question below independently. Carry out all computations to two decimal places. 1. Compute the company's return on investment (ROI). 2. The entrepreneur who founded the company is convinced that sales will increase next year by 150% and that net operating income will increase by 400%, with no increase in average operating assets. What would be the company's ROI 3. The Chief Financial Officer of the company believes a more realistic scenario would be a $2 million increase in sales, requiring an $800,000 increase in average operating assets, with a resulting $250,000 increase in net operating income. What would be the company's ROI in this scenario
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Why do the measures used in a balanced scorecard differ from company to company
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Cost-Volume-Profit Analysis and Return on Investment (ROI) [LOl] Images.com is a small Internet retailer of high-quality posters. The company has $800,000 in operating assets and fixed expenses of $160.000 per year. With this level of operating assets and fixed expenses, the company can support sales of up to S5 million per year. The company's contribution margin ratio is 10%, which means that an additional dollar of sales results in additional contribution margin, and net operating income, of 10 cents. Required: 1 Complete the following table showing the relationship between sales and return on investment (ROI). img 2. What happens to the company's return on investment (ROI) as sales increase Explain.
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Compute the Return on Investment (ROI) [LOl] Tundra Services Company, a division of a major oil company, provides various services to the operators of the North Slope oil field in Alaska. Data concerning the most recent year appear below: img Required: 1. Compute the margin for Tundra Services Company. 2. Compute the turnover for Tundra Services Company. 3. Compute the return on investment (ROI) for Tundra Services Company.
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Contrasting Return on Investment (ROI) and Residual Income [LOl, L02] Rains Nickless Ltd. of Australia has two divisions that operate in Perth and Darwin. Selected data on the two divisions follow: img Required: 1. Compute the return on investment (ROI) for each division. 2. Assume that the company evaluates performance using residual income and that the minimum required rate of return for any division is 16%. Compute the residual income for each division. 3. Is the Darwin Division's greater residual income an indication that it is better managed Explain.
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Computing and Interpreting Return on Investment (ROI) [LOl] Selected operating data on the two divisions of York Company are given below: img Required: 1. Compute the rate of return for each division using the return on investment (ROI) formula stated in terms of margin and turnover. 2. Which divisional manager seems to be doing the better job Why
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What is meant by the terms margin and turnover in ROI calculations
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What is meant by the term decentralization
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Why does the balanced scorecard include financial performance measures as well as measures of how well internal business processes are doing
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What is meant by residual income
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Distinguish between a cost center, a profit center, and an investment center.
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What is the difference between delivery cycle time and throughput time What four elements make up throughput time What elements of throughput time are value-added and what elements are non-value-added
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Return on Investment (ROI) and Residual Income Relations [LOl, L02] A family friend has asked your help in analyzing the operations of three anonymous companies operating in the same service sector industry. Supply the missing data in the table below: img
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Creating a Balanced Scorecard [L04] Mason Paper Company (MPC) manufactures commodity grade papers for use in computer printers and photocopiers. MPC has reported net operating losses for the last two years due to intense price pressure from much larger competitors. The MPC management team-including Kristen Townsend (CEO), Mike Martinez (vice president of Manufacturing), Tom Andrews (vice president of Marketing), and Wendy Chen (CFO)-is contemplating a change in strategy to save the company from impending bankruptcy. Excerpts from a recent management team meeting are shown below: Townsend: As we all know, the commodity paper manufacturing business is all about economies of scale. The largest competitors with the lowest cost per unit win. The limited capacity of our older machines prohibits us from competing in the high-volume commodity paper grades. Furthermore, expanding our capacity by acquiring a new paper-making machine is out of the question given the extraordinarily high price tag. Therefore, 1propose that we abandon cost reduction as a strategic goal and instead pursue manufacturing flexibility as the key to our future success. Chen: Manufacturing flexibility What does that mean Martinez: It means we have to abandon our "crank out as many tons of paper as possible" mentality. Instead, we need to pursue the low-volume business opportunities that exist in the nonstandard, specialized paper grades. To succeed in this regard, we'll need to improve our flexibility in three ways. First, we must improve our ability to switch between paper grades. Right now, we require an average of four hours to change over to another paper grade. Timely customer deliveries are a function of changeover performance. Second, we need to expand the range of paper grades that we can manufacture. Currently, we can only manufacture three paper grades. Our customers must perceive that we are a "one-stop shop" that can meet all of their paper grade needs. Third, we will need to improve our yields (e.g., tons of acceptable output relative to total tons processed) in the nonstandard paper grades. Our percentage of waste within these grades will be unacceptably high unless we do something to improve our processes. Our variable costs will go through the roof if we cannot increase our yields! Chen: Wait just a minute! These changes are going to destroy our equipment utilization numbers! Andrews: You're right Wendy; however, equipment utilization is not the name of the game when it conies to competing in terms of flexibility. Our customers don't care about our equipment utilization. Instead, as Mike just alluded to, they want just-in-time delivery of smaller quantities of a full range of paper grades. If we can shrink the elapsed time from order placement to order delivery and expand our product offerings, it will increase sales from current customers and bring in new customers. Furthermore, we will be able to charge a premium price because of the limited competition within this niche from our cost-focused larger competitors. Our contribution margin per ton should drastically improve! Martinez: Of course, executing the change in strategy will not be easy. We'll need to make a substantial investment in training because ultimately it is our people who create our flexible manufacturing capabilities. Chen: If we adopt this new strategy, it is definitely going to impact how we measure performance. We'll need to create measures that motivate our employees to make decisions that support our flexibility goals. Townsend: Wendy, you hit the nail right on the head. For our next meeting, could you pull together some potential measures that support our new strategy Required: 1. Contrast MPC's previous manufacturing strategy with its new manufacturing strategy. 2. Generally speaking, why would a company that changes its strategic goals need to change its performance measurement system as well What are some examples of measures that would have been appropriate for MPC prior to its change in strategy Why would those measures fail to support MPC's new strategy 3. Using Exhibit 12-8 as a guide, construct a balanced scorecard that would support MPC's new manufacturing strategy. Use arrows to show the causal links between the performance measures and show whether the performance measure should increase or decrease over time. Feel free to create measures that may not be specifically mentioned in the chapter, but nonetheless make sense given the strategic goals of the company. 4. What hypotheses are built into MPC's balanced scorecard Which of these hypotheses do you believe are most questionable and why
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In what way can the use of ROI as a performance measure for investment centers lead to bad decisions How does the residual income approach overcome this problem
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Residual Income [L02] Midlands Design Ltd. of Manchester, England, is a company specializing in providing design services to residential developers. Last year the company had net operating income of £400,000 on sales of £2,000,000. The company's average operating assets for the year were £2,200,000 and its minimum required rate of return was 16%. (The currency in the United Kingdom is the pound, denoted by £.)Required: Compute the company's residual income for the year.
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What benefits result from decentralization
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