Susan Lopez, a consultant with Deloitte & Young, has just begun an engagement at Four Corners Airlines, which is based in Santa Fe, New Mexico. The company has fallen on hard times of late despite record profits for the rest of the airline industry. Management is somewhat set in its ways and could probably use some “new blood,” as the most recent hire to the firm’s executive team was 12 years ago. In Lopez’s first meeting with the team, the airline’s chief executive officer commented that “all that mattered in this industry were load factors—the percentage of seats sold on scheduled flights. If load factors were adequate, everything else would take care of itself.” Lopez noted that while this measure was important, other, broader facets of operation were significant as well. She asked if any of the management team had heard of the balanced scorecard, and received dead silence as a response. Based on her experiences with other engagements, including two that involved airlines, Lopez was convinced that the balanced scorecard could provide benefits in helping to solve the airline’s woes. After a presentation about the philosophy of the balanced scorecard, Four Corners Airlines’ management team accepted her idea, feeling that a shift in operating philosophy was needed for survival. Required: 1. What is a balanced scorecard, and what are its typical key elements? 2. Lopez wants to assemble a committee to prepare the airline’s balanced scorecard. List several of the company’s functional areas (e.g., marketing) that should be represented on the committee. 3. Identify a number of measures to evaluate the key elements that you specified in requirement 1. Measures would include items such as load factors, number of passenger complaints, percentage of on-time arrivals, and so forth. 4. Do you see any problems with management’s prior focus on only one measure (i.e., load factor)? Briefly explain.

Consider the following conversation between Leonard Bryner, president and manager of a firm engaged in job manufacturing, and Chuck Davis, certified management accountant, the firms controller. Leonard: Chuck, as you know, our firm has been losing market share over the past 3 years. We have been losing more and more bids, and I dont understand why. At first, I thought that other firms were undercutting simply to gain business, but after examining some of the public financial reports, I believe that they are making a reasonable rate of return. I am beginning to believe that our costs and costing methods are at fault. Chuck: I cant agree with that. We have good control over our costs. Like most firms in our industry, we use a normal job-costing system. I really dont see any significant waste in the plant. Leonard: After talking with some other managers at a recent industrial convention, Im not so sure that waste by itself is the issue. They talked about activity-based management, activity-based costing, and continuous improvement. They mentioned the use of something called activity drivers to assign overhead. They claimed that these new procedures can help to produce more efficiency in manufacturing, better control of overhead, and more accurate product costing. A big deal was made of eliminating activities that added no value. Maybe our bids are too high because these other firms have found ways to decrease their overhead costs and to increase the accuracy of their product costing. Chuck: I doubt it. For one thing, I dont see how we can increase product-costing accuracy. So many of our costs are indirect costs. Furthermore, everyone uses some measure of production activity to assign overhead costs. I imagine that what they are calling activity drivers is just some new buzzword for measures of production volume. Fads in costing come and go. I wouldnt worry about it. Ill bet that our problems with decreasing sales are temporary. You might recall that we experienced a similar problem about 12 years agoit was 2 years before it straightened out. Required: 1. Do you agree or disagree with Chuck Davis and the advice that he gave Leonard Bryner? Explain. 2. Was there anything wrong or unethical in the behavior that Chuck Davis displayed? Explain your reasoning. 3. Do you think that Chuck was well informedthat he was aware of the accounting implications of ABC and that he knew what was meant by cost drivers? Should he have been well informed? Review (in Chapter 1) the first category of the Statement of Ethical Professional Practice for management accountants. Do any of these standards apply in Chucks case?

Ella Maksimov is CEO of her own marketing firm. The firm recently moved from a strip mall in the suburbs to an office space in a downtown building, in order to make the firms employees more accessible to clients. Two new clients are interested in using Ellas advertising services but both clients are in the same line of business, meaning that Ellas company can represent only one of the clients. Pampered Pooches wants to hire Ellas firm for a one-year contract for web, newspaper, radio, and direct mail advertising. Pampered will pay $126,000 for these services. Ella estimates the cost of the services requested by Pampered Pooches to be $83,000. Delightful Dogs is interested in hiring Ella to produce mass mailings and web ads. Delightful will pay Ella $94,000 for these services and Ella estimates the cost of these services to be $47,000. Identify any relevant costs, relevant revenues, sunk costs, and opportunity costs that Ella Graham has to consider in making the decision whether to represent Pampered Pooches or Delightful Dogs.

Hatfield Medical Supplys stock price had been lagging its industry averages, so its board of directors brought in a new CEO, Jaiden Lee. Lee had brought in Ashley Novak, a finance MBA who had been working for a consulting company, to replace the old CFO, and Lee asked Novak to develop the financial planning section of the strategic plan. In her previous job, Novaks primary task had been to help clients develop financial forecasts, and that was one reason Lee hired her. Novak began by comparing Hatfields financial ratios to the industry averages. If any ratio was substandard, she discussed it with the responsible manager to see what could be done to improve the situation. The following data show Hatfields latest financial statements plus some ratios and other data that Novak plans to use in her analysis. Hatfield Medical Supply (Millions of Dollars, Except Per Share Data) Selected Additional Data for 2018 Using Hatfields data and its industry averages, how well run would you say Hatfield appears to be compared to other firms in its industry? What are its primary strengths and weaknesses? Be specific in your answer, and point to various ratios that support your position. Also, use the DuPont equation (see Chapter 7) as one part of your analysis.

Hatfield Medical Supplys stock price had been lagging its industry averages, so its board of directors brought in a new CEO, Jaiden Lee. Lee had brought in Ashley Novak, a finance MBA who had been working for a consulting company, to replace the old CFO, and Lee asked Novak to develop the financial planning section of the strategic plan. In her previous job, Novaks primary task had been to help clients develop financial forecasts, and that was one reason Lee hired her. Novak began by comparing Hatfields financial ratios to the industry averages. If any ratio was substandard, she discussed it with the responsible manager to see what could be done to improve the situation. The following data show Hatfields latest financial statements plus some ratios and other data that Novak plans to use in her analysis. Hatfield Medical Supply (Millions of Dollars, Except per Share Data) Selected Additional Data for 2019 Using Hatfields data and its industry averages, how well run would you say Hatfield appears to be in comparison with other firms in its industry? What are its primary strengths and weaknesses? Be specific in your answer and point to various ratios that support your position. Also, use the DuPont equation (see Chapter 3) as one part of your analysis.

ABC Airlines is a commercial airline that targets business and nonbusiness travelers. In recent months, the airline has been unprofitable. The company has break-even sales volume of 75% of capacity, which is significantly higher than the industry average of 65%. ABC's CEO, Richard Buchanan, is concerned about the recent string of losses and is considering a strategic plan that could reduce the break-even sales volume by increasing ticket prices. He has asked for your help in evaluating this plan. Instruction: As management accountants, write a brief memo to Richard Buchanan evaluating this strategy by discussing the advantages/disadvantages of increasing the ticket prices and its effect on the break even sales volume for ABC Airlines.

'Jenny Cochran, a graduate of The University of Tennessee with 4 years of experience as an equities analyst, was recently brought in as assistant to the chairman of the board of Computron Industries, a manufacturer of computer components. During the previous year, Computron had doubled its plant capacity, opened new sales offices outside its home territory, and launched an expensive advertising campaign. Cochran was assigned to evaluate the impact of the changes. She began by gathering financial statements and other data. (Data Attached) What effect did the expansion have on sales and net income? What effect did the expansion have on the asset side of the balance sheet? What do you conclude from the statement of cash flows? What is Computron’s net operating profit after taxes (NOPAT)? What are operating current assets? What are operating current liabilities? How much net operating working capital and total net operating capital does Computron have? What is Computron’s free cash flow…

Jenny Cochran, a graduate of The University of Tennessee with 4 years of experience as an equities analyst, was recently brought in as assistant to the chairman of the board of Computron Industries, a manufacturer of computer components. During the previous year, Computron had doubled its plant capacity, opened new sales offices outside its home territory, and launched an expensive advertising campaign. Cochran was assigned to evaluate the impact of the changes. She began by gathering financial statements and other data. (Data Attached) What is Computron’s free cash flow (FCF)? What are Computron’s “net uses” of its FCF? Calculate Computron’s return on invested capital (ROIC). Computron has a 10% cost of capital (WACC). What caused the decline in the ROIC? Was it due to operating profitability or capital utilization? Do you think Computron’s growth added value? What is Computron's EVA? The cost of capital was 10% in both years. Assume that a corporation has $200,000 of taxable income…

Terry House, the controller for MicroTech Software Company, is responsible for preparing the company’s financial statements. He learns that sales for the first quarter of the year have dropped so dramatically that the company is in danger of bankruptcy. As a result, he applies for an accounting position with another software company that competes with MicroTech. During his job interview, Terry is asked why he wants to leave MicroTech. He replies truthfully, “The company’s sales are down another 10% this quarter. I fear they will go out of business.” At that time, MicroTech had not released its sales results to the public. Discuss the ethics of this situation.

James Kirk is a financial executive with McDowell Enterprises. Although James Kirk has not had any formal training in finance or accounting, he has a “good sense” for numbers and has helped the company grow from a very small company ($500,000 sales) to a large operation ($45 million in sales). With the business growing steadily, however, the company needs to make a number of difficult financial decisions in which James Kirk feels a little “over his head.” He therefore has decided to hire a new employee with “numbers” expertise to help him. As a basis for determining whom to employ, he has decided to ask each prospective employee to prepare answers to questions relating to the following situations he has encountered recently. Here are the questions. a. In 2019, McDowell Enterprises negotiated and closed a long-term lease contract for newly constructed truck terminals and freight storage facilities. The buildings were constructed on land owned by the company. On January 1, 2020,…

Ella Maksimov is CEO of her own marketing firm. The firm recently moved from a strip mall in the suburbs to an office space in a downtown building, in order to make the firm’s employees more accessible to clients. Two new clients are interested in using Ella’s advertising services but both clients are in the same line of business, meaning that Ella’s company can represent only one of the clients. Pampered Pooches wants to hire Ella’s firm for a one-year contract for web, newspaper, radio, and direct mail advertising. Pampered will pay $126,000 for these services. Ella estimates the cost of the services requested by Pampered Pooches to be $83,000. Delightful Dogs is interested in hiring Ella to produce mass mailings and web ads. Delightful will pay Ella $94,000 for these services and Ella estimates the cost of these services to be $47,000. Identify any relevant costs, relevant revenues, sunk costs, and opportunity costs that Ella Graham has to consider in making the decision whether to…

Chris Guthrie was recently hired by S&S Air, Inc., to assist the company with its short-term financial planning and to evaluate the company’s performance. Chris graduated from college five years ago with a finance degree. He has been employed in the finance department of a Fortune 500 company since then. S&S Air was founded 10 years ago by two friends, Mark Sexton and Todd Story. The company has manufactured and sold light airplanes over this period, and the company’s products have received high reviews for safety and reliability. The company has a niche market in that it sells primarily to individuals who own and fly their own airplanes. The company has two models: the Birdie, which sells for $53,000, and the Eagle, which sells for $78,000. S&S Air is not publicly traded, but the company needs new funds for investment opportunities. In consultation with Tonisha Jones of underwriter Raines and Warren, Chris decided that a convertible bond issue with a 20-year maturity is…

Solution Summary: The author explains the meaning of a balanced scorecard and the key elements of it.

Videos

Want to see the full answer?

Chapter 1 Solutions