Performance Measurement

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Introduction In this text, I will use Apple's latest financial statements to compute its operating leverage, return on investment (ROI), economic value added (EVA), as well as return on invested capital (ROIC). Further, in addition to highlighting the advantages as well as disadvantages of the performance measures selected, I will also identify my preferred performance measure. Discussion Operating Leverage In the words of Heitger, Mowen and Hansen (2007), "the degree of operating leverage (DOL) can be measured for a given level of sales by taking the ratio of contribution margin to operating income." In basic terms, the degree of operating leverage is critical in the determination of how an entity's earning potential is affected by a certain level of operating leverage. Apple's degree of operating leverage could be computed as follows: DOL = Contribution Margin/Operating Income = 1.3 Return on Investment Return on assets according to Needles, Powers and Crosson (2010) can be computed by multiplying profit margin with asset turn over. This performance measure comes in handy in the evaluation of a given investment's efficiency. In our case, return on investment could be given by: ROI = Profit Margin * Asset Turnover. Profit Margin = Operating Income / Sales = 33,790,000/108,249,000 = 0.31 Asset Turnover = Revenue / Assets = 108,249,000/116,371,000 = 0.93 ROI = 0.31 * 0.93 = 0.29 Economic Value Added (EVA) In basic terms, EVA is essentially an attempt
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