COST ACCT
FD Edition
ISBN: 9781323843284
Author: Horngren
Publisher: PEARSON
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Chapter 23, Problem 23.39P
Financial and nonfinancial performance measures, goal congruence. (CMA, adapted) Precision Equipment specializes in the manufacture of medical equipment, a field that has become increasingly competitive. Approximately 2 years ago, Pedro Mendez, president of Precision, decided to revise the bonus plan (based, at the time, entirely on operating income) to encourage division managers to focus on areas that were important to customers and that added value without increasing cost. In addition to a profitability incentive, the revised plan includes incentives for reduced rework costs, reduced sales returns, and on-time deliveries. The company calculates and rewards bonuses semiannually on the following basis: A base bonus is calculated at 2% of operating income; this amount is then adjusted as follows:
- i. Reduced by excess of rework costs over and above 2% of operating income
- ii. No adjustment if rework costs are less than or equal to 2% of operating income
- i. Increased by $4,000 if more than 98% of deliveries are on time and by $1,500 if 96–98% of deliveries are on time
- ii. No adjustment if on-time deliveries are below 96%
- i. Increased by $2,500 if sales returns are less than or equal to 1.5% of sales
- ii. Decreased by 50% of excess of sales returns over 1.5% of sales
If the calculation of the bonus results in a negative amount for a particular period, the manager simply receives no bonus, and the negative amount is not carried forward to the next period.
Results for Precision’s Central division and Western division for 2017, the first year under the new bonus plan, follow. In 2016, under the old bonus plan, the Central division manager earned a bonus of $20,295 and the Western division manager received a bonus of $15,830.
- 1. Why did Mendez need to introduce these new performance measures? That is, why does Mendez need to use these performance measures in addition to the operating-income numbers for the period?
- 2. Calculate the bonus earned by each manager for each 6-month period and for 2017 overall.
- 3. What effect did the change in the bonus plan have on each manager’s behavior? Did the new bonus plan achieve what Mendez wanted? What changes, if any, would you make to the new bonus plan?
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Financial and nonnancial performance measures, goal congruence. (CMA, adapted) Precision Equipment specializes in the manufacture of medical equipment, a eld that has become increasingly competitive. Approximately 2 years ago, Pedro Mendez, president of Precision, decided to revise the bonus plan (based, at the time, entirely on operating income) to encourage division managers to focus on areas that were important to customers and that added value without increasing cost. In addition to a protability incentive, the revised plan includes incentives for reduced rework costs,reduced sales returns, and ontime deliveries. The company calculates and rewards bonuses semiannually on the following basis: A base bonus is calculated at 2% of operating income; this amount is then adjusted as follows:
Easy Removals offers a complete interstate, door-to-door solution for residential and commercial removals. As the market for removal services is very competitive, Easy Removals aims to deliver services at a low cost. Its management accountant prepared the following information - the growth, price-recovery, and productivity components that explain the change in operating income from 2020 to 2021.
Growth
Component
Price-recovery
Component
Productivity
Component
Revenue effect
$ 310,000 F
$ 98,000 U
-
Cost effect
$ 210,000 U
$ 32,000 U
$ 128,000 F
Suppose that during 2021, the market growth rate in the industry was 10%. The number of jobs billed was 400 and 500 in 2020 and 2021, respectively. Any increase in market share more than 10%, and any change in selling price, are the result of Easy Removals’ strategic actions.
Required:
Compute how much of the change in operating income from 2020 to 2021 is due to the: (a) industry-market-size factor; (b)…
he Pacific Division of Cullumber Industries reported the following data for the current year. Sales $4,179,930 Variable costs 2,625,000 Controllable fixed costs 825,000 Average operating assets 5,034,000 Top management is unhappy with the investment center’s return on investment. It asks the manager of the Pacific Division to submit plans to improve ROI in the next year. The manager believes it is feasible to consider the following independent courses of action. 1. Increase sales by $425,000 with no change in the contribution margin percentage. 2. Reduce variable costs by $145,986. 3. Reduce average operating assets by 4% (a) Compute the return on investment for the current year. (Round answers to 1 decimal place, e.g. 52.7%.) Return on investment enter the return on investment in percentages %
Chapter 23 Solutions
COST ACCT
Ch. 23 - Prob. 23.1QCh. 23 - Prob. 23.2QCh. 23 - What factors affecting ROI does the DuPont method...Ch. 23 - RI is not identical to ROI, although both measures...Ch. 23 - Describe EVA.Ch. 23 - Give three definitions of investment used in...Ch. 23 - Distinguish between measuring assets based on...Ch. 23 - Prob. 23.8QCh. 23 - Why is it important to distinguish between the...Ch. 23 - Prob. 23.10Q
Ch. 23 - Managers should be rewarded only on the basis of...Ch. 23 - Explain the role of benchmarking in evaluating...Ch. 23 - Explain the incentive problems that can arise when...Ch. 23 - Prob. 23.14QCh. 23 - Prob. 23.15QCh. 23 - During the current year, a strategic business unit...Ch. 23 - Assuming an increase in price levels over time,...Ch. 23 - If ROI Is used to evaluate a managers performance...Ch. 23 - The Long Haul Trucking Company is developing...Ch. 23 - ABC Inc. desires to maintain a capital structure...Ch. 23 - ROI, comparisons of three companies. (CMA,...Ch. 23 - Prob. 23.22ECh. 23 - ROI and RI. (D. Kleespie, adapted) The Sports...Ch. 23 - ROI and RI with manufacturing costs. Excellent...Ch. 23 - ROI, RI, EVA. Hamilton Corp. is a reinsurance and...Ch. 23 - Goal incongruence and ROI. Comfy Corporation...Ch. 23 - ROI, RI, EVA. Performance Auto Company operates a...Ch. 23 - Capital budgeting, RI. Ryan Alcoa, a new associate...Ch. 23 - Prob. 23.29ECh. 23 - ROI, RI, EVA, and performance evaluation. Cora...Ch. 23 - Prob. 23.31ECh. 23 - Prob. 23.32ECh. 23 - ROI performance measures based on historical cost...Ch. 23 - ROI, measurement alternatives for performance...Ch. 23 - Multinational firms, differing risk, comparison of...Ch. 23 - ROI, Rl, DuPont method, investment decisions,...Ch. 23 - Division managers compensation, levers of control...Ch. 23 - Executive compensation, balanced scorecard. Acme...Ch. 23 - Financial and nonfinancial performance measures,...Ch. 23 - Prob. 23.40PCh. 23 - Prob. 23.41PCh. 23 - RI, EVA, measurement alternatives, goal...
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