hhfma02.qc23.1_sh.tdxex Which is not one of the potential advantages of decentralization?

Transcription

1 hhfma02.qc23.1_sh.tdxex Which is not one of the potential advantages of decentralization?

2 hhfma02.qc23.2_sh.tdxex The Quaker Foods division of PepsiCo is most likely treated as a:

3 hhfma02.qc23.3_sh.tdxex Decentralization is often based on all the following except:

4 hhfma02.qc23.4_sh.tdxex Manufacturing yield rate (number of units produced per unit of time) would be a typical measure for which of the following balanced scorecard perspectives:

5 hhfma02.qc23.5_sh.tdxex Which of the following balanced scorecard perspectives essentially asks, "Can we continue to improve and create value?"

6 hhfma02.qc23.6_sh.tdxex Assume the Residential Division of Faucets had the following results last year (in thousands of dollars): What is the division's profit margin?

7 hhfma02.qc23.7_sh.tdxex Assume the Residential Division of Faucets had the following results last year (in thousands of dollars): What is the division's capital turnover?

8 hhfma02.qc23.8_sh.tdxex Assume the Residential Division of Faucets had the following results last year (in thousands of dollars): What is the division's ROI?

9 hhfma02.qc23.9_sh.tdxex Assume the Residential Division of Faucets had the following results last year (in thousands of dollars): What is the division's RI?

10 hhfma02.qc23.10_sh.tdxex The performance evaluation of a cost center is typically based on its:

11 hhfma02.s23.1_s.tdxex Decentralization divides company operation into various reporting units. Requirement 1. Explain why companies decentralize. Describe some typical methods of decentralization. Requirement 1. Companies usually decentralize when they to manage the entire organization's daily operations. Decentralization is often based on:

12 hhfma02.s23.2_s.tdxex Most decentralized subunits can be described as one of four different types of responsibility centers. Requirement 1. List the four most common types of responsibility centers and describe their responsibilities. Requirement 1. List the four most common types of responsibility centers. Select the choice that describe the responsibilities of each of the centers.

13 hhfma02.s23.3_s.tdxex Each of the following managers has been given certain decision-making authority. Requirement 1. Classify each of the following managers according to the type of responsibility center they manage.

14 hhfma02.s23.4_s.tdxex Well-designed performance evaluation systems accomplish many goals. Consider the following actions. Requirement 1. State which goal is being achieved by the action. a. Comparing targets to actual results b. Providing subunit managers with performance targets c. Comparing actual results with industry standards d. Providing bonuses to subunit managers who achieve performance targets e. Aligning subunit performance targets with company strategy f. Comparing actual results to the results of competitors g. Taking corrective actions h. Using the adage, "you get what you measure," when designing the performance evaluation system

15 hhfma02.s23.5_s.tdxex Consider the following key performance indicators. Requirement 1. Classify each of the key performance indicators according to the balanced scorecard perspective it addresses. Choose from financial perspective, customer perspective, internal business perspective, or learning and growth perspective. (If there is only one perspective, leave the second box blank.)

16 hhfma02.s23.6_s.tdxex Management by exception is a term often used in performance evaluation. Requirement 1. Describe management by exception and how it is used in the evaluation of cost, revenue, and profit centers. Requirement 1. Performance reports for cost, revenue and profit centers typically list, along with. Management by exception is a tool that allows management to focus its attention on important differences between. Using management by exception, management only investigates variances and/or variances. Management does not bother investigating smaller variances, since the cost.

17 hhfma02.s23.7_sh.tdxex Consider the following data: Requirement 1. Which of the corporate divisions is more profitable? Explain. Requirement 1. In terms of operating income the Division is more profitable because by $ million. In terms of return on investment (ROI) the Division is more profitable because the nearest whole percent). by % (Round all calculations to

18 hhfma02.s23.8_sh.tdxex Sports Company makes snowboards, downhill skis, cross-country skis, skateboards, surfboards, and in-line skates. The company has found it beneficial to split operations into two divisions based on the climate required for the sport: Snow sports and Non-snow sports. The following divisional information is available for the past year: (Click the icon to view the information.) 's management has specified a % target rate of return. The company's weighted average cost of capital (WACC) is % and its effective tax rate is %. Requirement 1. Calculate each division's profit margin. Interpret your results. Requirement 1. Calculate each division's profit margin. (Enter the profit margin as a percent.) The profit margin for the Snow sports division is %. The profit margin for the Non-snow sports division is %. Based on the divisions' profit margins, we know that the profit margins the divisions had different ROI's. Data Table

19 hhfma02.s23.9_sh.tdxex Sports Company makes snowboards, downhill skis, cross-country skis, skateboards, surfboards, and in-line skates. The company has found it beneficial to split operations into two divisions based on the climate required for the sport: Snow sports and Non-snow sports. The following divisional information is available for the past year: (Click the icon to view the information.) 's management has specified a % target rate of return. The company's weighted average cost of capital (WACC) is % and its effective tax rate is %. Requirements 1. Compute each division's capital turnover (round to two decimal places). Interpret your results. 2. Use your answers to question 1, along with the profit margin, to recalculate ROI using the expanded formula. Do your answers agree with the basic ROI? Requirement 1. Calculate each division's capital turnover. (Round your answers to two decimal places.) The capital turnover for the snow sports division is times. The capital turnover for the non-snow sports division is times. Based on the divisions' capital turnover rates, we know that the rates the divisions had different ROI's. Requirement 2. Use your answers to question 1, along with the profit margin, to recalculate ROI using the expanded formula. (Enter your answers as a percentage to one decimal place.) Using the expanded formula, the ROI for the snow sports division is %. Using the expanded formula, the ROI for the non-snow sports division is %. Do your answers agree with the basic ROI?

20 hhfma02.s23.9_sh.tdxex Data Table

21 hhfma02.s23.10_sh.tdxex Sports Company makes snowboards, downhill skis, cross-country skis, skateboards, surfboards, and in-line skates. The company has found it beneficial to split operations into two divisions based on the climate required for the sport: snow sports and Non-snow sports. The following divisional information is available for the past year: (Click the icon to view the information.) 's management has specified a % target rate of return. The company's weighted average cost of capital (WACC) is % and its effective tax rate is %. Requirement 1. Compute each division's RI. Interpret your results. Are your results consistent with each division's ROI? Requirement 1. Calculate each division's RI. The RI for the Snow sports division is $. The RI for the Non-snow sports division is $. Interpret your results. Both divisions have residual income. This means that the divisions are earning income at a rate that management's minimum expectations. Are your results consistent with each division's ROI? This result is with the ROI calculations. Data Table

22 hhfma02.s23.11_sh.tdxex Sports Company makes snowboards, downhill skis, cross-country skis, skateboards, surfboards, and in-line skates. The company has found it beneficial to split operations into two divisions based on the climate required for the sport: Snow sports and Non-snow sports. The following divisional information is available for the past year: (Click the icon to view the information.) 's management has specified a % target rate of return. The company's weighted average cost of capital (WACC) is % and its effective tax rate is %. Requirement 1. Compute each division's EVA. Interpret your results. Requirement 1. Compute each division's EVA. The EVA for the Snow sports division is $. The EVA for the Non-snow sports division is $ Interpret your results. Both divisions have economic value added. This means that the divisions are generating income for investors and long-term creditors at a rate that the expectations of these two groups of stakeholders. Data Table

23 hhfma02.e23.12_s.tdxex Grandma Jones Cookie Company sells homemade cookies made with organic ingredients. Her sales are strictly Web-based. The business is taking off more than Grandma Jones ever expected, with orders coming from across the country from both consumers and corporate event planners. Even by employing a full-time baker and a Web designer, Grandma Jones can no longer handle the business on her own. She wants your advice on whether she should decentralize and, if so, how she should do it. Requirement 1. Explain some of the advantages and disadvantages of decentralization and offer her three ways she might decentralize her company. Since the business is getting too large for Grandma Jones to handle, she would probably benefit from decentralizing her business. some of the advantages of decentralization are: Grandma Jones should also be made aware of the potential disadvantages of decentralization. Grandma Jones could decentralize in a number of different ways, for example, by:

24 hhfma02.e23.13_s.tdxex Financial performance is measured in many ways. Requirement 1. Explain the difference between lag and lead indicators. Are financial performance measures typically referred to as lag or lead indicators? Are operational measures (such as customer satisfaction ratings, defect rates, number of on-time deliveries, and so forth) typically referred to as lag or lead indicators? Explain why, using L.L.Bean (a catalog clothing merchandiser) as an example. Lag indicators are performance measures that tend to. They. Lead indicators are performance measures that tend to. They. Financial measures tend to be indicators. The financial results of a period. For example, L.L. Bean's fourth quarter sales are the result of management's. Operational measures tend to be indicators. Current customer satisfaction ratings, defect rates, and on-time delivery rates. For example, L.L. Bean's customers satisfaction.

25 hhfma02.e23.14_s.tdxex Well-designed performance evaluation systems accomplish many goals. Requirement 1. Describe the potential benefits performance evaluation systems offer. Well-designed performance evaluation systems offer companies many benefits. Management uses performance evaluation systems to do the following:

26 hhfma02.e23.15_s.tdxex Consider the following key performance indicators. Requirement 1. Classify each indicator according to the balanced scorecard perspective it addresses. Choose from the financial perspective, customer perspective, internal business perspective, or the learning and growth perspective. (If there is only one perspective, leave the second box blank.)

27 hhfma02.e23.15_s.tdxex

28 hhfma02.e23.16_sh.tdxex One subunit of Racer Sports Company had the following financial results last month: (Click the icon to view the financial results.) Requirements 1. Complete the performance evaluation report for this subunit. Enter the variance as a percentage rounded to two decimal places. 2. Based on the data presented, what type of responsibility center is this subunit? 3. Which items should be investigated if part of management's decision criteria is to investigate all variances exceeding $3,000 or 10%? 4. Should only unfavorable variances be investigated? Explain. Requirement 1. Complete the performance evaluation report. (Enter a variance for each account and select whether the variance is unfavorable or favorable. Enter the variance percent as a percentage rounded to two decimal places.) Requirement 2. What type of responsibility center is this unit?

29 hhfma02.e23.16_sh.tdxex Requirement 3. Which items should be investigated if part of management's decision criteria is to investigate all variances exceeding $3,000 or 10%? Requirement 4. Should only unfavorable variances be investigated? Favorable variances should be investigated to.

30 hhfma02.e23.16_sh.tdxex Data Table

31 hhfma02.e23.17_sh.tdxex The accountant for a subunit of Sports Company went on vacation before completing the subunit's monthly performance report. This is as far as she got: (Click the icon to view the performance report.) Requirements 1. Complete the performance evaluation report for this subunit. 2. Based on the data presented what type of responsibility center is this subunit? 3. Which items should be investigated if part of management's decision criteria is to investigate all variances exceeding $15,000? Requirement 1. Complete the performance evaluation report for this subunit. Requirement 2.

32 hhfma02.e23.17_sh.tdxex Based on the data presented what type of responsibility center is this subunit? Requirement 3. Which items should be investigated if part of management's decision criteria is to investigate all variances exceeding $15,000? Using the flexible budget variance as a guide the following items will be investigated: Using the sales volume variance as a guide the following items will be investigated:

33 hhfma02.e23.17_sh.tdxex Data Table

34 hhfma02.e23.18_sh.tdxex, a national manufacturer of lawn-mowing and snow-blowing equipment, segments its business according to customer type: professional and residential. The following divisional information was available for the past year (in thousands of dollars): (Click the icon to view the information.) Requirements 1. Calculate each division's ROI. Round all of your answers to four decimal places. 2. Calculate each division's profit margin. Interpret your results. 3. Calculate each division's capital turnover. Interpret your results. 4. Use the expanded ROI formula to confirm your results from requirement 1. What can you conclude? Requirement 1. Calculate each division's ROI. (Enter the answer as a percent rounded to two decimal places, XX.XX%.) The ROI for the residential division is %. (Enter the answer as a percent rounded to two decimal places, XX.XX%.) The ROI for the professional division is %. Each division's ROI is ; however, the has an even higher ROI than the. Requirement 2. (Enter the answer as a percent rounded to two decimal places, XX.XX%.) The profit margin for the residential division is %. (Enter the answer as a percent rounded to two decimal places, XX.XX%.) The profit margin for the professional division is %. The Professional Division is earning about $ on each dollar of sales whereas the Residential Division is only earning about $ on each dollar of sales. The higher profit margin helps to account for its higher ROI. Requirement 3. (Round your answer to two decimal places, X.XX.)

35 hhfma02.e23.18_sh.tdxex The capital turnover for the residential division is. (Round your answer to two decimal places, X.XX.) The capital turnover for the professional division is. The Professional Division is generating about of sales for every dollar of assets. The Residential Division is generating about of sales for each dollar of assets invested. The is more efficient. Requirement 4. Calculate each division's ROI using the expanded formula. Begin with the residential division. (Enter the answer as a percent rounded to two decimal places, XX.XX%.) The ROI for the residential division is %. Does your answers agree with the basic ROI? Calculate the ROI for the professional division. (Enter the answer as a percent rounded to two decimal places, XX.XX%.) The ROI for the professional division is %. Does your answers agree with the basic ROI? Even though the efficiency (as measured by the capital turnover) is higher than that of the, the profitability (as measured by the profit margin), is so much higher that it causes its ROI to be much higher than the.

36 hhfma02.e23.18_sh.tdxex Data Table Management has a % target rate of return for each division. ' weighted average cost of capital is % and its effective tax rate is %. Page 3 of 3

37 hhfma02.e23.19_sh.tdxex, a national manufacturer of lawn-mowing and snow-blowing equipment, segments its business according to customer type: professional and residential. The following divisional information was available for the past year (in thousands of dollars): (Click the icon to view the information.) Requirements 1. Calculate each division's RI. Interpret your results. 2. Calculate each division's EVA. Interpret your results. 3. Describe the conceptual and computational similarities and differences between RI and EVA. Requirement 1. Calculate each division's RI. Interpret your results. (Round your answer to the nearest thousand dollars.) The residential division's RI is $. The professional division's RI is $. exceeding managements' expectations. Requirement 2. Calculate each division's EVA. Interpret your results. (Round all interim calculations and your final answers to the nearest thousand dollars.) The residential division's EVA is $. The professional division's EVA is $. exceeding the stakeholders' expectations. Requirement 3. Describe the conceptual and computational similarities and differences between RI and EVA. equations calculate whether any income was created by the division above and beyond expectations. looks at income through the eyes of management, while looks at it through they eyes of the stockholders and long-term creditors. Let's compare the two equations by comparing the elements of their computations:

38 hhfma02.e23.19_sh.tdxex Data Table Management has a % target rate of return for each division. weighted average cost of capital is % and its effective tax rate is %.

39 hhfma02.p23.20a_sh.tdxex One subunit of Sports Company had the following financial results last month: (Click the icon to view the financial results.) (Click the icon to view the requirements.) Requirement 1. Complete the performance evaluation report for the subunit. (Enter a variance for each account and select whether the variance is unfavorable or favorable. Enter the variance percent as a percentage to two decimal places, XX.XX%.) Requirement 2. This performance report includes, therefore this subunit must be Requirement 3. If part of management's decision criteria is to investigate all variances equal to or exceeding $10,000 and exceeding 10%, then management should investigate the following:

40 hhfma02.p23.20a_sh.tdxex Requirement 4. Managers should investigate to determine the root cause of the variances.. Management needs to evaluate. Favorable variances Requirement 5. The flexible budget variances due to sales volume differences between budget and actual. Differences in sales volume are captured by the. The flexible budget variance is due to. Requirement 6. Management will. Additionally, they may not place much weight on because Requirement 7. The performance report addresses the perspective of the balanced scorecard. performance measures tend to be indicators. They typically Requirement 8. Complete the following table to identify one key performance indicator for the three other balanced scorecard perspectives.

41 hhfma02.p23.20a_sh.tdxex Each of these performance measures is a indicator which tend to. The performance indicators listed above are often better at.

42 hhfma02.p23.20a_sh.tdxex Data Table More Info Requirements: 1. Complete the performance evaluation report for the subunit (round to two decimal places). 2. Based on the data presented and your knowledge of the company, what type of responsibility center is this subunit? 3. Which items should be investigated if part of management's decision criteria is to investigate all variances equal to or exceeding $10,000 and exceeding 10% (both criteria must be met)? 4. Should only unfavorable variances be investigated? Explain. 5. Is it possible that the variances are due to a higher-than-expected sales volume? Explain. 6. Will management place equal weight on each of the variances? Explain.

43 hhfma02.p23.20a_sh.tdxex 7. Which balanced scorecard perspective is being addressed through this performance report? In your opinion, is this performance report a lead or lag indicator? Explain. 8. List one key performance indicator for the three other balanced scorecard perspectives. Make sure to indicate which perspective is being addressed by the indicators you list. Are they lead or lag indicators? Explain.

44 hhfma02.p23.21a_sh.tdxex is a national paint manufacturer and retailer. The company is segmented into five divisions: Paint stores (branded retail locations), Consumer (paint sold through stores like Sears, Home Depot, and Lowe's), Automotive (sales to auto manufacturers), International, and Administration. The following is selected divisional information for its two largest divisions: Paint stores and Consumer (in thousands of dollars). (Click the icon to view the information.) Management has specified a % target rate of return. The company's weighted average cost of capital is %. The company's effective tax rate is %. (Click the icon to view the requirements.) Requirement 1. Calculate each division's ROI. (Enter the ROI as a percent rounded to two decimal places.) The ROI for the Paint stores division is %. The ROI for the Consumer division is %. Requirement 2. Calculate each division's profit margin. (Enter the profit margin as a percent rounded to two decimal places.) The profit margin for the Paint stores division is %. The profit margin for the Consumer division is %. The division is more profitable on each dollar of sales. Requirement 3. Calculate each division's capital turnover. (Round to four decimal places.) The capital turnover for the Paint stores division is times. The capital turnover for the Consumer division is times. The division is more efficient in generating sales with its assets. Requirement 4. Use the expanded ROI formula to confirm your results from requirement 1. (Enter the rate as a percentage to two decimal places. Rounding differences may occur.)

45 hhfma02.p23.21a_sh.tdxex Using the expanded formula, the ROI for the Paint stores division is %. Using the expanded formula, the ROI for the Consumer division is %. The Consumer division's profitability on each dollar of sales is than the Paint stores division's profitability. However, the Paint store division's efficiency is significantly than the Consumer division's efficiency. These results cause the Paint stores division's ROI to be the Consumer division's ROI. Requirement 5. Calculate each division's RI. (Enter the amount in thousands. Use a minus sign to enter negative residual income.) The RI for the Paint stores division is $. The RI for the Consumer division is $. meeting management's target rate of return. A division with a negative RI should consider. Requirement 6. Calculate each division's EVA. (Use a minus sign or parentheses to enter negative EVA.) The EVA for the Paint stores division is $. The EVA for the Consumer division is $. creating more income than the company's stockholders and long-term creditors expect. Requirement 7. Describe the conceptual similarities and differences between RI and EVA. equations calculate whether any income was created by the division above and beyond expectations. looks at income through the eyes of management, while looks at it through the eyes of the stockholders and long-term creditors. Describe how the EVA computation differs from the RI computation.

46 hhfma02.p23.21a_sh.tdxex The EVA calculation uses where the RI calculation uses. Why? Because the portion of income paid to the government available to investors and long-term creditors. Unlike RI, within the EVA computation, total assets are reduced by. Why? Because funds owed to short-term creditors paid in the immediate future and be available for generating income in the long run. Since focuses on investors and creditors, it's calculation uses the, which represents the investors' and creditors' expected rate of return. Requirement 8. Total asset data was provided for this problem. If you were to gather this information from an annual report, how would you measure total assets? Most companies use the asset balance since the income used in the ROI calculation is earned over the year. The book value is often used because it is easily pulled from the balance sheet. However ROI using that value will artificially rise over time due to. Requirement 9. Describe some of the factors that management considers when setting its minimum rate of return. Requirement 10. Explain why some firms prefer to use RI rather than ROI for performance measurement. RI does a better job of.

47 hhfma02.p23.21a_sh.tdxex Requirement 11. Explain why budget versus actual performance reports are insufficient for evaluating the performance of investment centers. Investment centers are responsible for Budget versus actual performance reports are insufficient because they do not measure.

48 hhfma02.p23.21a_sh.tdxex Data Table More Info Requirements 1. Calculate each division's ROI. 2. Calculate each division's profit margin. Interpret your results. 3. Calculate each division's capital turnover. Interpret your results. 4. Use the expanded ROI formula to confirm your results from requirement 1. Interpret your results. 5. Calculate each division's RI. Interpret your results and offer a recommendation for any division with negative RI. 6. Calculate each division's EVA. Interpret your results. 7. Describe the conceptual and computational similarities and differences between RI and EVA. 8. Total asset data was provided in this problem. If you were to gather this information from an annual report, how would you measure total assets? Describe your measurement choices and some of the pros and cons of those choices. 9. Describe some of the factors that management considers when setting its minimum target rate of return. 10. Explain why some firms prefer to use RI rather than ROI for performance measurement. 11. Explain why budget versus actual performance reports are insufficient for evaluating the performance of investment centers.

49 hhfma02.p23.22b_sh.tdxex One subunit of Sports Company had the following financial results last month: (Click the icon to view the financial results.) (Click the icon to view the requirements.) Requirement 1. Complete the performance evaluation report for the subunit. (Enter a variance for each account and select whether the variance is unfavorable or favorable. Enter the variance percent as a percentage to two decimal places, XX.XX%.) Requirement 2. This performance report includes, therefore this subunit must be Requirement 3. If part of management's decision criteria is to investigate all variances equal to or exceeding $10,000 and exceeding 10%, then management should investigate the following:

50 hhfma02.p23.22b_sh.tdxex Requirement 4. Managers should investigate to determine the root cause of the variances.. Management needs to evaluate. Favorable variances Requirement 5. The flexible budget variances due to sales volume differences between budget and actual. Differences in sales volume are captured by the. The flexible budget variance is due to. Requirement 6. Management will. Additionally, they may not place much weight on because Requirement 7. The performance report addresses the perspective of the balanced scorecard. performance measures tend to be indicators. They typically Requirement 8. Complete the following table to identify one key performance indicator for the three other balanced scorecard perspectives.

51 hhfma02.p23.22b_sh.tdxex Each of these performance measures is a indicator which tend to. The performance indicators listed above are often better at.

52 hhfma02.p23.22b_sh.tdxex Data Table More Info Requirements: 1. Complete the performance evaluation report for the subunit (round to two decimal places). 2. Based on the data presented and your knowledge of the company, what type of responsibility center is this subunit? 3. Which items should be investigated if part of management's decision criteria is to investigate all variances equal to or exceeding $10,000 and exceeding 10% (both criteria must be met)? 4. Should only unfavorable variances be investigated? Explain. 5. Is it possible that the variances are due to a higher-than-expected sales volume? Explain. 6. Will management place equal weight on each of the variances? Explain.

53 hhfma02.p23.22b_sh.tdxex 7. Which balanced scorecard perspective is being addressed through this performance report? In your opinion, is this performance report a lead or lag indicator? Explain. 8. List one key performance indicator for the three other balanced scorecard perspectives. Make sure to indicate which perspective is being addressed by the indicators you list. Are they lead or lag indicators? Explain.

54 hhfma02.p23.23b_sh.tdxex is a national paint manufacturer and retailer. The company is segmented into five divisions: Paint stores (branded retail locations), Consumer (paint sold through stores like Sears, Home Depot, and Lowe's), Automotive (sales to auto manufacturers), International, and Administration. The following is selected divisional information for its two largest divisions: Paint stores and Consumer (in thousands of dollars). (Click the icon to view the information.) Management has specified a % target rate of return. The company's weighted average cost of capital is %. The company's effective tax rate is %. (Click the icon to view the requirements.) Requirement 1. Calculate each division's ROI. (Enter the ROI as a percent rounded to two decimal places.) The ROI for the Paint stores division is %. The ROI for the Consumer division is %. Requirement 2. Calculate each division's profit margin. (Enter the profit margin as a percent rounded to two decimal places.) The profit margin for the Paint stores division is %. The profit margin for the Consumer division is %. The division is more profitable on each dollar of sales. Requirement 3. Calculate each division's capital turnover. (Round to four decimal places.) The capital turnover for the Paint stores division is times. The capital turnover for the Consumer division is times. The division is more efficient in generating sales with its assets. Requirement 4. Use the expanded ROI formula to confirm your results from requirement 1. (Enter the rate as a percentage to two decimal places. Rounding differences may occur.)

55 hhfma02.p23.23b_sh.tdxex Using the expanded formula, the ROI for the Paint stores division is %. Using the expanded formula, the ROI for the Consumer division is %. The Consumer division's profitability on each dollar of sales is than the Paint stores division's profitability. However, the Paint store division's efficiency is significantly than the Consumer division's efficiency. These results cause the Paint stores division's ROI to be the Consumer division's ROI. Requirement 5. Calculate each division's RI. (Enter the amount in thousands. Use a minus sign to enter negative residual income.) The RI for the Paint stores division is $. The RI for the Consumer division is $. meeting management's target rate of return. A division with a negative RI should consider. Requirement 6. Calculate each division's EVA. (Use a minus sign or parentheses to enter negative EVA.) The EVA for the Paint stores division is $. The EVA for the Consumer division is $. creating more income than the company's stockholders and long-term creditors expect. Requirement 7. Describe the conceptual similarities and differences between RI and EVA. equations calculate whether any income was created by the division above and beyond expectations. looks at income through the eyes of management, while looks at it through the eyes of the stockholders and long-term creditors. Describe how the EVA computation differs from the RI computation.

56 hhfma02.p23.23b_sh.tdxex The EVA calculation uses where the RI calculation uses. Why? Because the portion of income paid to the government available to investors and long-term creditors. Unlike RI, within the EVA computation, total assets are reduced by. Why? Because funds owed to short-term creditors paid in the immediate future and be available for generating income in the long run. Since focuses on investors and creditors, it's calculation uses the, which represents the investors' and creditors' expected rate of return. Requirement 8. Total asset data was provided for this problem. If you were to gather this information from an annual report, how would you measure total assets? Most companies use the asset balance since the income used in the ROI calculation is earned over the year. The book value is often used because it is easily pulled from the balance sheet. However ROI using that value will artificially rise over time due to. Requirement 9. Describe some of the factors that management considers when setting its minimum rate of return. Requirement 10. Explain why some firms prefer to use RI rather than ROI for performance measurement. RI does a better job of.

57 hhfma02.p23.23b_sh.tdxex Requirement 11. Explain why budget versus actual performance reports are insufficient for evaluating the performance of investment centers. Investment centers are responsible for Budget versus actual performance reports are insufficient because they do not measure.

58 hhfma02.p23.23b_sh.tdxex Data Table More Info Requirements 1. Calculate each division's ROI. 2. Calculate each division's profit margin. Interpret your results. 3. Calculate each division's capital turnover. Interpret your results. 4. Use the expanded ROI formula to confirm your results from requirement 1. Interpret your results. 5. Calculate each division's RI. Interpret your results and offer a recommendation for any division with negative RI. 6. Calculate each division's EVA. Interpret your results. 7. Describe the conceptual and computational similarities and differences between RI and EVA. 8. Total asset data was provided in this problem. If you were to gather this information from an annual report, how would you measure total assets? Describe your measurement choices and some of the pros and cons of those choices. 9. Describe some of the factors that management considers when setting its minimum target rate of return. 10. Explain why some firms prefer to use RI rather than ROI for performance measurement. 11. Explain why budget versus actual performance reports are insufficient for evaluating the performance of investment centers.

59 hhfma02.e23.24_sh.tdxex Lawn Service experienced Sales of and Operating income of for Total assets were and total liabilities were at the end of 's target rate of return is % and WACC is %. Its 2011 tax rate was Requirement 1. Calculate 's profit margin for 's profit margin for 2011 is %. (Round your answer to the nearest percent.)