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Part One

The Management

Control Environment

Division
K l

Budget-data ($0005): 1987 budgeted profit 1987 budgeted current assets 1987 budgeted fixed assets

$ 90 100 400

$ 55 200 400 Division

K

$ 50 300 500

Actual data ($OOOs): 1987 profits 1987 current assets 1987 fixed assets

$ 80 90 400

60 190 450

$ 50 350 550

Questions
Calculate the ROI objective and actual ROI for each division for 1987. Calculate the EVAobjective for each division for 1987. Calculate the actual EVAfor each division for 1987 and calculate the extent that it is above or below objective. 7. Refer to the budgeted profits and assets of the three divisions of the JKL Company provided in Problem 6. Listed below are four management actions, together with the financial impact of these actions. For each of these situations, calculate the impact on the budgeted ROI and EVA for each division. (Another way of looking at this problem is to calculate the extent to which these actions help or hurt the divisional managers in attaining their profi goals.)
(a) (b) (c)

Situation 1.

Situation 2.

Situation 3.

Situation 4.

'An investment in fixed assets is made. This action increases the average fixed assets by $100,000 and profits by $10,000. An investment in fixed assets is made. This action increases the average assets by $100,000 and profits by $7,000. A program to reduce inventories is instituted. As a result, inventories are reduced by $50,000. Increased costs and reduced sales resulting from the lower inventory levels reduce profits by $5,000. A plant is closed down and sold. Fixed assets are reduced by $75,000, and profits (from reduced sales) are decreased by $7,500.