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Chapter 24: Q24RQ (page 1355)
What are some limitations of financial performance measures?
Measurement problems and a short-term concentration are two drawbacks of financial performance measurements.
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Question: What is the purpose of a responsibility accounting system?
Question: Using ROI and RI to evaluate investment centers
This problem continues the Piedmont Computer Company situation from Chapter 23. Piedmont Computer Company reported 2020 sales of \(3,600,000 and operating income of \)183,600. Average total assets during 2020 were $600,000. Piedmont Computer Company’s target rate of return is 16%.
Calculate Piedmont Computer Company’s profit margin ratio, asset turnover ratio, ROI, and RI for 2020. Comment on the results.
Well-designed performance evaluation systems accomplish many goals. Consider the following actions, and 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 of competitors
g. Taking corrective actions
h. Using the adage “you get what you measure” when designing the performance evaluation system
Refer to the information in Short Exercise S24-7.
Requirements
1. Compute each division’s asset turnover ratio (round to two decimal places). Interpret your results.
2. Use your answers to Requirement 1, along with the profit margin ratio, to recalculate ROI using the expanded formula. Do your answers agree with the basic ROI in Short Exercise S24-7?
One subunit of Racer Sports Company had the following financial results last month:
Subunit X Actual Results Flexible Budget Flexible Budget % Variance
Variance (F or U) (F or U)
Net Sales
Revenue \( 476,000 \) 451,000
Variable
Expenses 261,000 251,000
Contribution
Margin 215,000 200,000
Traceable
Fixed Expenses 40,000 26,000
Divisional
Segment Margin \( 175,000 \) 174,000
Requirements
1. Complete the performance evaluation report for this 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 \(8,000 andexceeding 10% (both criteria must be met)?
4. Should only unfavorable variances be investigated? Explain.
5. Is it possible that the variances are due to a higher-than-expected sales volume? Explain.
6. Will management place equal weight on each of the variances exceeding \)8,000? Explain.
7. Which balanced scorecard perspective is being addressed through this performance report? In your opinion, is this performance report a lead or a 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.
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