Chapter 19: Strategic performance measurement

Question 1

Name three criteria to evaluate financial performance of investment centers on?

Answer 1

1. Extent to which measures motivates high level of effort
2. Extent to which use of measures results in goal congruence
3. Extent to which measures reward managers fairly for their effort and skill.

Question 2

What is return on investments?

Answer 2

measure of profit divided by measure of investment in a business unit.

Question 3

What is return on sales?

Answer 3

amount of profit per sales dollar; measures manager’s ability to control expenses and increase revenues to improve profitability

Question 4

What is asset turnover?

Answer 4

amount of sales dollars generated per dollar of investment; measures manager’s ability to increase sales from a given level of investment.

Question 5

What is replacement cost?

Answer 5

current cost to replace asset at current level of service and functionality of that asset

Question 6

What is liquidation value?

Answer 6

estimated price that could be received from the sale of the assets of a business unit.

Question 7

What is residual income?

Answer 7

dollar amount equal to income of a business unit - imputed charge for level of investment in the division.

Question 8

Name two limitation of residual income?

Answer 8

• Prevents comparison between divisions of different sizes because it is a number
• Relatively small changes in minimum rate of return significantly impact RI for business units of different sizes.