Professional Documents
Culture Documents
Chapter 11
Performance Measurement in
Decentralized Organizations
Solutions to Questions
11-1 In a decentralized organization, decision-making authority isnt confined to a few top
executives; instead, decision-making authority is spread throughout the organization.
11-2 The benefits of decentralization include: (1) by delegating day-to-day problem solving
to lower-level managers, top management can concentrate on bigger issues such as overall
strategy; (2) empowering lower-level managers to make decisions puts decision-making
authority in the hands of those who tend to have the most detailed and up-to-date
information about day-to-day operations; (3) by eliminating layers of decision-making and
approvals, organizations can respond more quickly to customers and to changes in the
operating environment; (4) granting decision-making authority helps train lower-level
managers for higher-level positions; and (5) empowering lower-level managers to make
decisions can increase their motivation and job satisfaction.
11-3 The manager of a cost center has control over cost, but not revenue or the use of
investment funds. A profit center manager has control over both cost and revenue. An
investment center manager has control over cost and revenue and the use of investment
funds.
11-4 Margin is the ratio of net operating income to total sales. Turnover is the ratio of total
sales to average operating assets. The product of the two numbers is the ROI.
11-5 Residual income is the net operating income an investment center earns above the
companys minimum required rate of return on operating assets.
11-6 If ROI is used to evaluate performance, a manager of an investment center may
reject a profitable investment opportunity whose rate of return exceeds the companys
required rate of return but whose rate of return is less than the investment centers current
ROI. The residual income approach overcomes this problem because any project whose rate
of return exceeds the companys minimum required rate of return will result in an increase in
residual income.
11-7 The difference between delivery cycle time and throughput time is the waiting period
between when an order is received and when production on the order is started. Throughput
time is made up of process time, inspection time, move time, and queue time. Process time
is value-added time and inspection time, move time, and queue time are non-value-added
time.
11-8 An MCE of less than 1 means that the production process includes non-value-added
time. An MCE of 0.40, for example, means that 40% of throughput time consists of actual
processing, and that the other 60% consists of
11-1
11-2
Margin =
=
2.
Turnover =
=
3.
Sales
Average operating assets
$18,000,000
= 0.5
$36,000,000
11-3
11-4
2,200,000
400,000
352,000
48,000
MCE=
MCE=
11-5
11-6
Contribution
margin per
ton
Customer
Number of new
customers acquired
Time to fill
an order
Internal
Business
Processes
Number of different +
paper grades
produced
Average change
over time
Learning
and Growth
Average
+
manufacturing
yield
Number of
employees trained +
to support the
flexibility strategy
11-7
11-8
11-9
(b)
(c)
Net
Average
Operatin Operatin
(a)
g
g
ROI
Sales
Income*
Assets
(b) (c)
$4,500,00 $290,000 $800,000 36.25%
0
$4,600,00 $300,000 $800,000 37.50%
0
$4,700,00 $310,000 $800,000 38.75%
0
$4,800,00 $320,000 $800,000 40.00%
0
$4,900,00 $330,000 $800,000 41.25%
0
$5,000,00 $340,000 $800,000 42.50%
0
*Sales Contribution Margin Ratio Fixed Expenses
11-10
Margin =
=
Turnover =
=
11-11
2.
Margin =
$800,000(1.00 + 4.00)
$8,000,000(1.00 + 1.50)
$4,000,000
= 20%
$20,000,000
Turnover =
Sales
Average operating assets
$20,000,000
= 6.25
$3,200,000
11-12
Margin =
$800,000 + $250,000
$8,000,000 + $2,000,000
$1,050,000
= 10.5%
$10,000,000
Turnover =
Sales
Average operating assets
$8,000,000 + $2,000,000
$3,200,000 + $800,000
$10,000,000
= 2.5
$4,000,000
11-13
ROI =
2.
Sales
Average operating assets
Perth:
$630,000
$9,000,000
= 7% 3 = 21%
$9,000,000
$3,000,000
Darwin:
$1,800,000
$20,000,000
= 9% 2 = 18%
$20,000,000
$10,000,000
Perth
Darwin
$10,000,00
Average operating assets.............. $3,000,000
0
Net operating income...................
$630,000 $1,800,000
Minimum required return on
average operating assets16%
Average operating assets........
480,000 1,600,000
Residual income............................
$150,000 $ 200,000
3. No, the Darwin Division is simply larger than the Perth Division
and for this reason one would expect that it would have a
greater amount of residual income. Residual income cant be
used to compare the performance of divisions of different sizes.
Larger divisions will almost always look better. In fact, in the
case above, Darwin does not appear to be as well managed as
Perth. Note from Part (1) that Darwin has only an 18% ROI as
compared to 21% for Perth.
11-14
Sales.....................................
Net operating income............
Average operating assets......
Return on investment (ROI)...
Minimum required rate of
return:
Percentage..........................
Dollar amount.....................
Residual income....................
Company Company
A
B
$400,00
$750,00
0 *
0*
$32,000
$45,000 *
$160,00
$250,00
0 *
0
20% *
18% *
Company
C
$600,00
0*
$24,000
$150,00
0*
16%
15% *
20%
$24,000
$50,000 *
$8,000
$(5,000)
12% *
$18,000
$6,000 *
*Given.
11-15
2.
Division A: ROI =
$300,000
$6,000,000
= 5% 4 = 20%
$6,000,000
$1,500,000
Division B: ROI =
$900,000
$10,000,000
= 9% 2 = 18%
$10,000,000
$5,000,000
Division C: ROI =
$180,000
$8,000,000
= 2.25% 4 = 9%
$8,000,000
$2,000,000
Division A
Division B
Division C
Average operating
assets........................... $1,500,000 $5,000,000 $2,000,000
Required rate of return....
15%
18%
12%
Minimum required return $ 225,000 $ 900,000 $ 240,000
Actual net operating
income......................... $ 300,000 $ 900,000 $ 180,000
Minimum required return
(above).........................
225,000
900,000
240,000
Residual income.............. $ 75,000 $
0 $ (60,000)
11-16
Division A
Division B Division C
20%
18%
9%
Reject
Reject
Accept
15%
18%
12%
Accept
Reject
Accept
11-17
ROI =
Sales
Average operating assets
Eastern Division:
$90,000
$1,000,000
= 9% 2 = 18%
$1,000,000
$500,000
Western Division:
$105,000
$1,750,000
= 6% 3.5 = 21%
$1,750,000
$500,000
11-18
Profit margin
Customer
satisfaction +
with
effectiveness
Internal Business
Processes
Sales
Number of new
customers
acquired
Customer
satisfaction
with
efficiency
Customer
satisfaction +
with service
quality
Average number of
errors per tax
return
Ratio of billable
+
hours to total hours
Learning
And Growth
Percentage of job +
offers accepted
Amount of compensation
paid above industry
average
Employee
morale
11-19
Average number of
years to be promoted
11-20
11-21
11-22
11-23
Margin =
=
Turnover =
=
Margin =
$16,000 + $6,000
$800,000 + $80,000
$22,000
= 2.5%
$880,000
Turnover =
Sales
Average operating assets
$800,000 + $80,000
$100,000
$880,000
= 8.8
$100,000
11-24
Margin =
$16,000 + $3,200
$800,000
$19,200
= 2.4%
$800,000
Turnover =
=
Sales
Average operating assets
$800,000
=8
$100,000
Margin =
=
Turnover =
$800,000
$100,000 - $20,000
$800,000
= 10
$80,000
11-25
Sales...................................
Net operating income..........
Average operating assets....
Margin.................................
Turnover..............................
Return on investment (ROI).
Fab
$800,00
0*
$72,000 *
$400,00
0
9%
2.0
18% *
Division
Consultin
g
$650,00
0
$26,000
$130,00
0 *
4% *
5.0 *
20%
IT
$500,00
0
$40,000 *
$200,00
0
8% *
2.5
20% *
*Given.
Note that the Consulting and IT Divisions apparently have
different strategies to obtain the same 20% return. The Consulting
Division has a low margin and a high turnover, whereas the IT
Division has just the opposite.
11-26
Present
New Line
Total
$21,000,00 $9,000,00
$30,000,0
(1) Sales.......................
0
0
00
Net operating
$2,310,00
(2) income................. $1,680,000 $630,000 *
0
$3,000,00
$8,250,00
(3) Operating assets.... $5,250,000
0
0
(4) Margin (2) (1)......
8.0%
7.0%
7.7%
(5) Turnover (1) (3)...
4.00
3.00
3.64
(6) ROI (4) (5)...........
32%
21%
28%
*
Sales........................................................
Variable expenses (65% $9,000,000). . .
Contribution margin.................................
Fixed expenses........................................
Net operating income..............................
$9,000,00
0
5,850,000
3,150,000
2,520,000
$ 630,000
Total
$8,250,00
0
15%
$1,237,50
0
$2,310,00
0
1,237,50
0
$1,072,50
11-28
to accept the new product line because adding the product line
would increase the total amount of his divisions residual
income, as shown above.
11-29
7% *
7%
*Given.
NAA Report No. 35 states (p. 35):
Introducing sales to measure level of operations helps to
disclose specific areas for more intensive investigation.
Company B does as well as Company A in terms of profit
margin, for both companies earn 14% on sales. But Company B
has a much lower turnover of capital than does Company A.
Whereas a dollar of investment in Company A supports two
dollars in sales each period, a dollar investment in Company B
supports only 50 cents in sales each period. This suggests
11-30
11-31
11-32
1
0.6
0.7
0.5
3.6
5.4
Month
2
3
0.5
0.7
0.5
3.6
5.3
0.5
0.4
0.4
2.6
3.9
4
0.4
0.3
0.5
1.7
2.9
9.6
5.4
15.0
8.7
5.3
14.0
5.3
3.9
9.2
4.7
2.9
7.6
11-33
Month
0.4
0.3
0.5
0.4
1.2
0.9
0.5
33.3% 44.4%
11-34
Total profit
Sales
Customer
Customer
satisfaction with
service
Internal
Business
Processes
Learning
and
Growth
Customer
satisfaction with
menu choices
Average time
to prepare an
order
Average time
Number of
to take
menu items
orders
Dining area
cleanliness
Percentag
e of dining
room staff
completing
hospitality
course
Percentag
e of
kitchen
staff
completin
g cooking
course
11-35
11-37
11-38
Cash....................................
Accounts receivable............
Inventory.............................
Plant and equipment (net). .
Total operating assets.........
Ending
Balances
$ 130,000
480,000
490,000
820,000
$1,920,00
0
Beginning
Balances
$ 125,000
340,000
570,000
845,000
$1,880,00
0
$1,880,000 + $1,920,000
= $1,900,000
2
Net operating income
Sales
$627,000
= 15%
$4,180,000
Sales
Average operating assets
$4,180,000
= 2.2
$1,900,000
11-39
$627,000
380,000
$247,000
11-40
11-41
ROI =
=
Sales
Average operating assets
$80,000
$1,000,000
$1,000,000
$500,000
= 8% 2 = 16%
2
.
ROI =
=
$90,000
$1,000,000
$1,000,000
$500,000
9%
(Increase)
3
.
ROI =
=
(Unchanged)
18%
(Increase)
$80,000
$1,000,000
$1,000,000
$400,000
8%
(Unchanged)
2.5
(Increase)
20%
(Increase)
11-42
100%
60%
40%
ROI =
=
$120,000
$1,100,000
$1,100,000
$500,000
10.91%
2.2
(Increase)
(Increase)
24%
(Increase)
$85,000
$1,000,000
$1,000,000
$625,000
ROI =
=
8.5%
(Increase)
6.
ROI =
=
ROI =
=
(Decrease)
13.6%
(Decrease)
$80,000
$1,000,000
$1,000,000
$320,000
8%
(Unchanged)
7.
1.6
3.125
(Increase)
25%
(Increase)
$60,000
$1,000,000
$1,000,000
$480,000
6%
(Decrease)
2.08
(Increase)
11-43
12.5%
(Decrease)
11-44
Return on
Stockholders
Equity
Customer
Customer perception of +
first-to-market
capability
Internal
Business
Processes
Learning
and
Growth
R&D Yield
Customer perception +
of product quality
Defect rates
Percentage of job +
offers accepted
Dollars invested in
engineering
technology
Dollars invested in
engineering training per
engineer
11-45
Sales
Customer
Number of repeat customers
Internal
Business
Processes
Room
cleanliness
Percentage of
+
error-free repeat
customer check-ins
Learning
and
Growth
Employee
turnover
Average time to
resolve customer
complaint
Employee
morale
as shown in
survey
Number of employees +
receiving database
training
11-46
o
o
Applied Pharmaceuticals
If the dollars invested in engineering technology increase,
then the R&D yield will increase.
If the percentage of job offers accepted increases, then the
R&D yield will increase.
If the dollars invested in engineering training per engineer
increase, then the R&D yield will increase.
If the R&D yield increases, then customer perception of firstto-market capability will increase.
If the defects per million opportunities decrease, then the
customer perception of product quality will increase.
If the customer perception of first-to-market capability
increases, then the return on stockholders equity will
increase.
If the customer perception of product quality increases, then
the return on stockholders equity will increase.
Destination Resort International
If the employee turnover decreases, then the percentage of
error-free repeat customer check-ins and room cleanliness
will increase and the average time to resolve customer
complaints will decrease.
If the number of employees receiving database training
increases, then the percentage of error-free repeat customer
check-ins will increase.
If employee morale increases, then the percentage of errorfree repeat customer check-ins and room cleanliness will
increase and the average time to resolve customer
complaints will decrease.
If the percentage of error-free repeat customer check-ins
increases, then the number of repeat customers will
increase.
11-47
11-48
11-49
Month
2
3
0.6
0.1
1.4
5.6
7.7
0.6
0.3
1.3
5.7
7.9
0.6
0.8
1.4
5.7
8.5
0.6
0.6
1.3
5.6
8.1
15.2
7.9
23.1
12.3
8.1
20.4
9.6
8.5
18.1
11-50
Month
0.6
0.8
1.4
0.0
2.8
0.6
0.0
1.4
0.0
2.0
21.4% 30.0%
11-51
Total profit
Average age of
accounts
receivable
Customer
Internal
Business
Processes
Learning
and
Growth
Customer
satisfaction with
accuracy of
charge account
bills
Percentage of
charge account
bills containing
errors
Written-off
accounts
receivable as a
percentage of
sales
+
Unsold inventory
at end of season
as a percentage
of total cost of
sales
Percentage of
suppliers making
just-in-time
deliveries
Percentage of sales
clerks trained to
correctly enter
data on charge
account slips
11-52
11-53
11-54
11-55