Exercise 12-9 from 4 th edition Before Company A Company B Company C Sales......
ID: 398591 • 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
12-1 Decentralization is the process of transferring the authority of decision making power and accountability or responsibility of activities or results from an individual or group to other. It is the distribution of responsibility to the whole organization than a few top authorities.
12-2 The benefits that result from decentralization are:
- distribution of responsibilities help the top management to look into more complex activities and focus on forming strategies and implementing them effectively
- keeps the lower level employees more involved and informed about the company's local conditions hence giving them the sense of responsibility.
- They can be more responsive towards managers and customers
- the low-level employees feel more motivated with the responsibility given to them and hence work with more dedication.
- they gain more experience which can be helpful for them as well as the organization if the need arises to promote them.
12-3 Cost center- A unit in the organization that, in operating assets, can control costs but not investment or revenues
Profit center- A business unit that has control over the revenues that generate profit but no control over the cost or investments
Investment center- A business unit where the control is over investments and not costs or profits.
12-4 Margin is the amount obtained by dividing the net operating income by sales. It is increased by an increase in the selling price, decrease in the operating expenses and increase in the unit sales. Turnover is when sales are divided by average operating assists.
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