EXAM MODE

Question 1

Benefits of EVA

Answer 1

• Link to the overall corporate objective of maximising shh wealth.
• If positive > business generate return above that required by the providers of the finance
• Encourage investment for the future - removing cost (advertising & dev) from the performance period and treating them like cap exp.
• This reduce the dysfunctional temptation for mgt to engage in short-term decision making
• EVA consistent with the NPV - increase EVA, increase NPV
• Good for communication - NPV is widely used appraisal measure in business

Question 2

Operational Gearing

Answer 2

How sensitive is the business profitability towards reduction in revenue.

Question 3

Why OG calculated as FC over VC

Answer 3

As revenue reduces, variable costs also reduce - however fixed costs remain the same.

So, if the business operation highly rely on fixed cost, higher business risk (more sensitive towards reduction in revenue)

Question 4

Tunnel Vision

Answer 4

Focusing on one area while ignoring others that may be equally important

For example, based on the perf report - it can be summarized that the board is focusing on profitability, dividend and number of stores. All these measures do not include the other important areas of performance such as providing a superior customer experience . ..

Question 5

Sub-optimisation

Answer 5

Departments or individuals improve their performance but harm the overall organisation’s objectives.

A production department is rewarded based on low unit costs, so they produce in large batches to reduce cost per unit.
But this leads to excess inventory, which increases storage costs and causes problems for the sales and finance departments — harming the overall performance of the company.

This shows the department optimised its own goal, but at the expense of the wider organisation.

Question 6

Gaming

Answer 6

Manipulating performance measures or targets to give the appearance of good performance without real improvement.

For example, purposely recognize the cost incurred in the wrong year so the profit target seems to be achieved.

Question 7

Myopia

Answer 7

A short-term focus that ignores long-term consequences.

Example: A manager cuts research spending to boost this year’s profits, harming innovation in the future.

Question 8

Misinterpretation

Answer 8

Definition: Incorrectly understanding or using performance data.

Example: High return rates are seen as customer misuse rather than poor product quality.

Question 9

Ossification

Answer 9

Definition: Resistance or reluctance to change performance measures or strategies.

Example: A company refuses to update its outdated IT system because “it has always worked this way,” even though it’s slowing down operations.

Question 10

VFM (3 E’s)

Answer 10

Economic - lowest cost of input without compromising quality

Efficiency - minimizing input, maximizing output

Effectiveness - achievingthe objective