Exercise 12-9 from 4 th edition Before Company A Company B Company C Sales......
ID: 398045 • Letter: E
Question
Exercise 12-9 from 4th edition
Before
Company A
Company B
Company C
Sales...................................
$9,000,000
*
$7,000,000
*
$4,500,000
*
Net operating income.............
?????
$280,000
*
Average operating assets........
$3,000,000
*
???
$1,800,000
*
Return on investment (ROI)....
18%*
14%*
Minimum required rate of return:
Percentage.........................
16%*
??
15%*
Dollar amount....................
?????
$320,000
*
Residual income....................
?????
????
$90,000
*
After
Company A
Company B
Company C
Sales....................................
$9,000,000
*
$7,000,000
*
$4,500,000
Net operating income.............
$540,000
$280,000
*
$360,000
Average operating assets........
$3,000,000
*
$2,000,000
$1,800,000
Return on investment (ROI)....
18%*
14%*
20%
Minimum required rate of return:
Percentage.........................
16%*
16%
15%*
Dollar amount.....................
$480,000
$320,000
*
$270,000
Residual income....................
$60,000
$(40,000)
$90,000
Explain how they got the answers? Retrace their steps!
Part Two:
12-1 What is meant by the term decentralization?
12-2 What benefits result from decentralization?
12-3 Distinguish among a cost center, a profit center, and an investment center.
12-4 What is meant by the terms margin and turnover in ROI calculations?
12-5 What is meant by residual income?
12-6 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?
12-9 Why do the measures used in a balanced scorecard differ from company to company?
12-10 Why does the balanced scorecard include financial performance measures as well as measures of how well internal business processes are doing?
Before
Company A
Company B
Company C
Sales...................................
$9,000,000
*
$7,000,000
*
$4,500,000
*
Net operating income.............
?????
$280,000
*
Average operating assets........
$3,000,000
*
???
$1,800,000
*
Return on investment (ROI)....
18%*
14%*
Minimum required rate of return:
Percentage.........................
16%*
??
15%*
Dollar amount....................
?????
$320,000
*
Residual income....................
?????
????
$90,000
*
Explanation / Answer
Decentralization is a process of moving away from the decision making authority from the central body to the divisions within the company, geography, sub-units etc. These decision-making authorities are called responsibility centers.
Benefits:
Cost Center: Doesn't earn revenue but incurs a cost to the company. These are mainly the support functions in a company such as HR and Administration.
Profit Center: Center that earns revenue and incurs profit or loss. These are the engineering departments in a company that is into making cars.
Investment Center: The investment center is a separate business entity that is responsible for generating its own revenue and expenses.
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