LO 12.1Match each of the following with its appropriate term.
| A. Controllable factors | i. This is the part of an organization in which management is evaluated based on the ability to contain costs; the manager primarily has control only over costs. |
| B. Cost center | ii. This means to align the goals of the business with the personal goals of the manager. |
| C. Metric | iii. These components of the organization are components for which the manager is responsible and can control. |
| D. Goal congruence | iv. This is the means to measure something such as a goal or target. |
| E. Investment center | v. This is a system that evaluates management in a way that will link the goals of the corporation with those of the manager. |
| F. Performance measurement system | vi. For this center, management is responsible for revenues, costs, and assets and is evaluated based on these three components. |
LO 12.1Florentino Allers is the production manager of Electronics Manufacturer. Due to limited capacity, the company can only produce one of two possible products:
- An industrial motherboard with a 75% probability of making a profit of $1 million and a 25% probability of making a profit of $150,000
- A regular motherboard with a 100% chance of making a profit of $710,000
Florentino will get a 20% bonus from his department. Florentino has the responsibility to choose between the two products and is more of a risk-taker, more so than most of the top management at Electronics Manufacturer.
- Which option is Florentino more likely to choose and why?
- Which option would the company be more likely to choose and why?
- What changes should the company make to Florentino’s compensation to avoid unnecessary risks?
LO 12.3Macon Mills is a division of Bolin Products, Inc. During the most recent year, Macon had a net income of $40 million. Included in the income was interest expense of $2,800,000. The company’s tax rate was 40%. Total assets were $470 million, current liabilities were $104,000,000, and $72,000,000 of the current liabilities are noninterest bearing. What are the invested capital and ROI for Macon?
LO 12.3Jefferson Memorial Hospital is an investment center as a division of Hospitals United. During the past year, Jefferson reported an after-tax income of $7 million. Total interest expense was $3,200,000, and the hospital tax rate was 30%. Total assets totaled $70 million, and non-interest-bearing current liabilities were $22,800,000. The required rate of return established by Jefferson is equal to 18% of invested capital. What is the residual income of Jefferson Memorial Hospital?
LO 12.4Crawford’s Books and Things has a traditional bookstore housed downtown Charlotte. The store has been there forty years, and many customers love the fact that they can hold the books in their hands and browse the offerings. Crawford’s just started an online book division for people who like to order books online.
EVA for the Charlotte store is about $13 million, while EVA for the online division shows a value of –$2.2 million.
- Explain why it might be better to evaluate the online division using a balanced scorecard.
- Suggest two measures for the customer dimension that would be appropriate for the online division and two measures for the internal processes dimension of the balanced scorecard that would be appropriate for the online division.
LO 12.4Coral Creations has strategic plans that call for rapid growth, a limited number of units for each design to enhance exclusivity, designs for the perfect fit, on-time delivery to customers, retention of highly trained employees with innovative skills, and excellent inventory control.
- Suggest one performance measure for each dimension of the balanced scorecard for Coral Creations.
- Take one of your measures and discuss the linkage it has to multiple strategies in Coral’s plan.