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CHAPTER 13 STRATEGY, BALANCED SCORECARD, AND STRATEGIC PROFITABILITY ANALYSIS 13-1 Strategy specifies how an organization matches its own

capabilities with the
opportunities in the marketplace to accomplish its objectives.

13-2 The five key forces to consider in industry analysis are: (a) competitors, (b) potential
entrants into the market, (c) equivalent products, (d) bargaining power of customers, and (e) bargaining power of input suppliers.

13-3 Two generic strategies are (1) product differentiation, an organization’s ability to offer
products or services perceived by its customers to be superior and unique relative to the products or services of its competitors and (2) cost leadership, an organization’s ability to achieve lower costs relative to competitors through productivity and efficiency improvements, elimination of waste, and tight cost control.

13-4 The four key perspectives in the balanced scorecard are: (1) Financial perspective—this
perspective evaluates the profitability of the strategy, (2) Customer perspective—this perspective identifies the targeted market segments and measures the company’s success in these segments, (3) Internal business process perspective—this perspective focuses on internal operations that further both the customer perspective by creating value for customers and the financial perspective by increasing shareholder wealth, and (4) Learning and growth perspective—this perspective identifies the capabilities in which the organization must excel in order to achieve superior internal processes that create value for customers and shareholders.

13-5 Reengineering is the fundamental rethinking and redesign of business processes to
achieve improvements in critical measures of performance such as cost, quality, service, speed, and customer satisfaction.

13-6 A good balanced scorecard design has several features:
1. 2. 3. 4. 5. It tells the story of a company’s strategy by articulating a sequence of cause-and-effect relationships. It helps to communicate the strategy to all members of the organization by translating the strategy into a coherent and linked set of understandable and measurable operational targets. It places strong emphasis on financial objectives and measures in for-profit companies. Nonfinancial measures are regarded as part of a program to achieve future financial performance. It limits the number of measures to only those that are critical to the implementation of strategy. It highlights suboptimal tradeoffs that managers may make when they fail to consider operational and financial measures together.

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13-7 Pitfalls to avoid when implementing a balanced scorecard are:
1. 2. 3. 4. 5. 6. Don’t assume the cause-and-effect linkages are precise; they are merely hypotheses. An organization must gather evidence of these linkages over time. Don’t seek improvements across all of the measures all of the time. Don’t use only objective measures in the balanced scorecard. Don’t fail to consider both costs and benefits of different initiatives before including these initiatives in the balanced scorecard. Don’t ignore nonfinancial measures when evaluating managers and employees. Don’t use too many measures.

13-8 Three key components in doing a strategic analysis of operating income are:
1. 2. 3. The growth component which measures the changes in revenues and costs attributable solely to an increase in the quantity of output sold from one year to the next. The price-recovery component which measures the changes in revenues and costs attributable solely to changes in the prices of inputs and outputs from one year to the next. The productivity component which measures the change in costs attributable to a change in the quantity and mix of inputs used in the current year relative to the quantity and mix of inputs that would have been used in the previous year to produce current year output.

13-9

An analyst can incorporate other factors such as the growth in the overall market and reductions in selling prices resulting from productivity gains into a strategic analysis of operating income. By doing so, the analyst can attribute the sources of operating income changes to particular factors of interests. For example, the analyst will combine the operating income effects of strategic price reductions and any resulting growth with the productivity component to evaluate a company’s cost leadership strategy.

13-10 Engineered costs result from a cause-and-effect relationship between the cost driver,
output, and the (direct or indirect) resources used to produce that output. Discretionary costs arise from periodic (usually) annual decisions regarding the maximum amount to be incurred. There is no measurable cause-and-effect relationship between output and resources used.

13-11 No. Identifying unused capacity is easier in the case of engineered costs. The cost
analyst can use the cause-and-effect relationship between output and resources used to determine the amount of unused capacity. The absence of a cause-and-effect relationship in the case of discretionary costs makes identifying resource usage and, hence, unused capacity much more difficult.

13-12 Downsizing (also called rightsizing) is an integrated approach configuring processes,
products, and people to match costs to the activities that need to be performed for operating effectively and efficiently in the present and future. Downsizing is an attempt to eliminate unused capacity.

13-13 A partial productivity measure is the quantity of output produced divided by the
quantity of an individual input used (e.g., direct materials or direct manufacturing labor).

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13-14 Total factor productivity is the quantity of output produced divided by the costs of all
inputs used, where the inputs are costed on the basis of current period prices.

13-15 No. Total factor productivity (TFP) and partial productivity measures work best
together because the strengths of one offset weaknesses in the other. TFP measures are comprehensive, consider all inputs together, and explicitly consider economic substitution among inputs. Physical partial productivity measures are easier to calculate and understand and, as in the case of labor productivity, relate directly to employees’ tasks. Partial productivity measures are also easier to compare across different plants and different time periods.

13-16 (15 min.) Balanced scorecard.
1. La Quinta’s 2004 strategy is a cost leadership strategy. La Quinta plans to grow by producing high-quality boxes at a low cost delivered to customers in a timely manner. La Quinta’s boxes are not differentiated, and there are many other manufacturers who produce similar boxes. To succeed, La Quinta must achieve lower costs relative to competitors through productivity and efficiency improvements. 2. Measures that we would expect to see on a La Quinta’s balanced scorecard for 2004 are

Financial Perspective (1) Operating income from productivity gain, (2) operating income from growth, (3) cost reductions in key areas. These measures evaluate whether La Quinta has successfully reduced costs and generated growth through cost leadership. Customer Perspective (1) Market share, (2) new customers, (3) customer satisfaction index, (4) customer retention, (5) time taken to fulfill customer orders. The logic is that improvements in these customer measures are leading indicators of superior financial performance. Internal Business Process Perspective (1) Yield, (2) productivity, (3) order delivery time, (4) on-time delivery. Improvements in these measures are expected to lead to more satisfied customers and in turn to superior financial performance Learning and Growth Perspective (1) Percentage of employees trained in process and quality management, (2) employee satisfaction, (3) number of major process improvements. Improvements in these measures have a cause-and-effect relationship with improvements in internal business processes, which in turn lead to customer satisfaction and financial performance.

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13-17 (20 min.) Analysis of growth, price-recovery, and productivity components (continuation of 13-16).
1. La Quinta’s operating income gain is consistent with the cost leadership strategy identified in requirement 1 of Exercise 13-16. The increase in operating income in 2004 was driven by the $180,000 gain in productivity in 2004. La Quinta took advantage of its productivity gain to reduce the prices of its boxes and to fuel growth. It increased market share even though the total market size was unchanged. 2. The productivity component measures the change in costs attributable to a change in the quantity and mix of inputs used in a year relative to the quantity and mix of inputs that would have been used in a previous year to produce the current year output. It measures the amount by which operating income increases and costs decrease through the productive use of input quantities. When comparing productivities across years, the productivity calculations use current year input prices in all calculations. Hence, the productivity component is unaffected by input price changes. The productivity component represents savings in both variable costs and fixed costs. With respect to variable costs, such as direct materials, productivity improvements immediately translate into cost savings. In the case of fixed costs, such as fixed manufacturing conversion costs, productivity gains result only if management takes actions to reduce unused capacity. For example, reengineering manufacturing processes will decrease the capacity needed to produce a given level of output, but it will lead to a productivity gain only if management reduces the unused capacity by, say, selling off the excess capacity.

13-18 (20-30 min.) Balanced scorecard.
Strategic Perspectives
▪ Financial

Performance Objectives
▪ Increase shareholder value ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪

Measures Earnings per share Net income Return on assets Return on sales Return on equity Product cost per unit Customer cost per unit Profit per salesperson

▪ Increase profit generated by each salesperson ▪ Customer ▪ Acquire new customers ▪ Retain customers ▪ Develop profitable customers ▪ Improve manufacturing quality ▪ Introduce new products

▪ Number of new customers ▪ Percentage of customers retained ▪ Customer profitability ▪ Percentage of defective product units

▪ Internal Business Processs

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700).13-18 (Cont’d. and productivity components.060 U 0 $103.600) x $15 = 151.) Growth.700 – 19. 1. assuming the 2003 input-output relationship continued in 2004.306 T-shirts (20.000) x $2 Total cost effect of growth component = $103.) ▪ Minimize invoice error rate ▪ On-time delivery by suppliers ▪ Increase proprietary products ▪ Learning and Growth ▪ Increase information system capabilities ▪ Enhance employee skills ▪ Percentage of error-free invoices ▪ Percentage of on-time deliveries by suppliers ▪ Number of patents ▪ Percentage of processes with real-time feedback ▪ Employee turnover rate ▪ Average job-related training hours per employee 13-19 (30 min.000 ÷ 19.000 – 40.500 F Actual units of input or capacity that would have been used to produce 2004 output assuming the same input-output relationship that existed in 2003 Cost effect of growth component = – Actual units of input or capacity to produce 2003 output × Input price in 2003 T-shirts purchased in 2004 when 29.600 units sold in 2003. The Growth Component Revenue effect of growth component = Actual units of output sold in 2004 – Actual units of output sold in 2003 × Output price in 2003 = (29. Administrative costs will not change since adequate capacity exists in 2003 to support the number of customers in 2004. price-recovery.060 U 13-5 . The cost effects of growth component are: Materials costs (30.306 – 20. equal 30.700 units are sold instead of the 19.000) × $10 Administrative costs (40.600 × 29.

the net increase in operating income as a result of growth component equals: Revenue effect of growth component $151.060 U Change in operating income due to growth component $ 48.306 F Change in operating income due to price-recovery component $ 4. the net increase in operating income as a result of the price recovery component equals: Revenue effect of price-recovery component $29.000 Total cost effect of price-recovery component In summary.700 U Cost effect of price-recovery component 34.13-19 (Cont’d.00) × 40.606 F The Productivity Component Actual units of inputs or capacity used to produce 2004 output Actual units of inputs or capacity that would have been used to produce 2004 output assuming the same input-output relationship that existed in 2003 Productivity component = – × Input price in 2004 13-6 .700 = $29.) In summary.440 F The Price-Recovery Component Revenue effect of price recovery component = Output price in 2004 – Output price in 2003 × Actual units of output sold in 2004 = ($14 – $15) × 29.306 F 4.500 F Cost effect of growth component 103.90 – $2.306 F Cost effect of price-recovery component = Input prices in 2004 – Input prices in 2003 × Cost of T-shirts purchased ($9 – $10) × 30.306 Administrative costs ($1.700 U Actual units of inputs or capacity that would have been used to produce 2004 output assuming the same input-output relationship that existed in 2003 $30.000 F $34.

400 2. Oceano was also able to earn additional operating income by improving its productivity.606 F $ 2.354 F $10.440 F Revenue and Cost Effects of PriceRecovery Component in 2004 (3) $29.306) × $9 Administrative costs (36.800 338.000) × $1.060 U $ 48.000 Cost Effect of Productivity Component in 2004 (4) – $10.90 Change in operating income due to productivity component The strategic analysis of profitability is as follows: Revenue and Cost Effects of Growth Component in 2004 (2) $151.400 $ 77. 13-7 .000 $ 14.306 F $ 4. The company was able to drop its selling price and substantially increase its sales volume.700 U 34.500 F 103.000 – 30.000 – 40. The analysis indicates that a significant amount of the increase in operating income resulted from Oceano’s growth which came from its cost leadership.) The productivity component of cost changes are: Cost of T-shirts purchased (30.600 F $10.354 F Income Statement Amounts in 2003 (1) Revenues Costs Operating income $294.000 280.354 Income Statement Amounts in 2004 (5) $415.754 F 7.13-19 (Cont’d.

(2) improvements in manufacturing processes. (3) order delivery time. (4) employee satisfaction. Balanced Scorecard measures for 2003 follow: Financial Perspective (1) Increase in operating income from charging higher margins. Learning and Growth Perspective (1) Development time for designing new machines. (3) employee education and skill levels. balanced scorecard. (2) new product features added. which in turn lead to customer satisfaction and financial performance. Improvements in these measures are expected to result in more satisfied customers and in turn superior financial performance.13-20 (15 min. Meredith’s D4H machine is distinct from its competitors and generally regarded as superior to competitors’ products. Customer Perspective (1) Market share in high-end special-purpose textile machines. (2) customer satisfaction. (3) new customers. Improvements in these measures have a cause-and-effect relationship with improvements in internal business processes. Meredith Corporation follows a product differentiation strategy in 2003. To succeed.) Strategy. 13-8 . 2. (2) price premium earned on products. Internal Business Process Perspective (1) Manufacturing quality. 1. Meredith must continue to differentiate its product and charge a premium price. Meredith’s strategy should result in improvements in these customer measures which are leading indicators of superior financial performance. These measures indicate whether Meredith has been able to charge premium prices and achieve operating income increases through product differentiation.

400.000 Costs Direct materials costs ($8 × 300.000 × 100.200.000 940.500 F 2.600.000) 2.400.000 Manufacturing conversion costs ($8.000 6.007.000 kilogram ( × 200 210).000. assuming the 2002 input300. 1.500 Change in operating income $607. 8.000. $8.000 × 12) 1. Operating income for each year is as follows: 2002 2003 Revenue ($40.000 1.) Strategic analysis of operating income (continuation of 13-20).000 output relationship continued into 2003.000 = = 0 13-9 . $9.500 Operating income $1.820.000 U Manufacturing conversion costs (250 − 250) × $8.000. Manufacturing conversion costs and selling and customer-service costs will not change since adequate capacity exists in 2002 to support year 2003 output and customers.000 $8.000 Total costs 6.000 2.000 F Actual units of input or     capacity that would Actual units of   Cost effect  Input have been used to produce inputs or capacity   × prices of growth =  − used to produce   year 2003 output assuming component  in 2002 the same input .000 Selling & customer service costs ($10.635. R&D costs would not change in 2002 if Meredith had to produce and sell the higher 2003 volume in 2002.212.50 × 310.output 2002 output     relationship that existed in 2002    Direct materials costs that would be required in 2003 to produce 210 units instead of the 200 units produced in 2002.100 × 250) 2.000 $2.000 = $400.000 × 250.000 × 210) $8.025. equal 315. $42. $101.900 × 95) 1.000) × $8 $120.000.000 × 200.000 2.13-21 (30 min.000 − 300.812. The cost effects of growth component are: Direct materials costs (315. The Growth Component Revenue effect  Actual units of Actual units of  Output   of growth =  output sold − output sold  × price   in 2002 component in 2003 in 2002   = (210 − 200) × $40.000 × 12.500 Design costs ($100.

000 U Change in operating income due to growth component $280.000 U Selling & customer-service costs($9.000 U Total cost effect of price-recovery component $184.000 F Design costs ($101.000) × 250 = 25.000 F The Price-Recovery Component Revenue effect of Actual units  Output price Output price  price .-serv.) In summary.000) × 210 = $420.000 (12-12) × $100.000) × 100 = 10.000 − $100.500 U In summary.500 U Change in operating income due to price-recovery component $235.recovery =   in 2003 − in 2002  × of output    sold in 2003 component = ($42.000) × 12 = 12.50 − $8) × 315.900 − $10.500 F 13-10 .output component 2003 2002   relationship that     existed in 2002 Direct materials costs ($8.000 = $157.000 = $120. the net increase in operating income as a result of the growth component equals: Revenue effect of growth component $400.Selling & cust.500 U Manufacturing conversion costs ($8.000 F Actual units of inputs or capacity Input   Input that would have been used   Cost effect of prices in prices in   to produce year 2003 output price . the net increase in operating income as a result of the pricerecovery component equals: Revenue effect of price-recovery component $420.recovery =  year − year  ×   assuming the same input .000 − $40.000 F Cost effect of growth component 120. costs = Design costs 0 0 (100 − 100)× $25.000 F Cost effect of price-recovery component 184.000 U Cost effect of growth component 13-21 (Cont’d.100 − $8.

000 = 0 Change in operating income due to productivity component$92.600.007.000 F 184.13-21 (Cont’d.100 = 0 Selling & customer-service costs (95 − 100) × $9.500 F Manufacturing conversion costs (250 − 250) × $8.000 U $280.50 = $42.000 F $8.output relationship    that existed in 2002   The productivity component of cost changes are Direct materials costs (310.000 F Revenue and Cost Effect Income Cost Effects of of Statement Price-Recovery Productivity Amounts Component Component in 2003 in 2003 in 2003 (5) = (3) (4) (1) + (2) + (3) + (4) $420.000 F 120.400.900 = 49.500 Change in operating income 3.) The Productivity Component Actual units of     inputs or capacity that    Actual units of would have been used  Input  inputs or capacity  Productivity = − to produce year 2003  × prices in component  used to produce  2003  year 2003 output output assuming the same   input . The analysis of operating income indicates that a significant amount of the increase in operating income resulted from Meredith’s product differentiation strategy. The company was able to continue to charge a premium price while growing sales.500 U $235. Meredith was also able to earn additional operating income by improving its productivity.000 Revenue and Cost Effects of Growth Component in 2003 (2) $400.820.000 6.000 $1.000) × $8. 13-11 .000 6.000 F $ 92.000 − 315.500 $2.500 F −− $ 92.500 F Design costs (12 − 12) × $101.000 F The change in operating income between 2002 and 2003 can be analyzed as follows: Income Statement Amounts in 2002 (1) Revenues Costs Operating income $8.000.500 F $607.812.

Meredith’s operating income increase in 2003 was also helped by a growth in the overall market and some productivity improvements. 13-12 . and productivity components (continuation of 13-21). and 4 (10 − 6) units is due to an increase in market share.500 U $92.000 F The change in operating income between 2002 and 2003 can be summarized as follows: Change due to industry-market-size Change due to product differentiation Change due to cost leadership Change in operating income $168. 3% or 6 (3% × 200) units is due to growth in market size. Effect of the industry-market-size factor If the 10-unit increase in sales from 200 to 210 units.000 (the growth component in Exercise 13-21) × $168. Nearly 57% ($347.000 F 10 Effect of product differentiation The change in operating income due to: Increase in the selling price of D4H (revenue effect of price recovery) Increase in price of inputs (cost effect of price recovery) Growth in market share due to product differentiation $280.000 F $347.500 F Meredith has been successful in implementing its product differentiation strategy.000 (the growth component in Exercise 13-21) × Change in operating income due to product differentiation Effect of cost leadership The change in operating income from cost leadership is: Productivity component 4 10 112.000 F 184.13-22 (20 min. The change in Meredith’s operating income from the industry-market size factor rather than from specific strategic actions is: 6 $280. price-recovery.) Analysis of growth.500) of the increase in operating income during 2003 was due to product differentiation.000 F 347.500 F $420.500 F 92.500 ÷ $607.000 F $607.

Meredith can reduce manufacturing capacity from 250 units to 220 (250 − 30) units.900 Design Cost of Unused Capacity 40 20 $324. which is key to its strategy.000. (250 – 210) × $8.) Identifying and managing unused capacity (continuation of 13-20). 2. 250 − 210. It cannot reduce capacity further (by another 30 units to 190 units) because it would then not have enough capacity to manufacture 210 units in 2003 (units that contribute significantly to operating income).000 198. For example. 10. rather than on cost reduction. Meredith may have chosen to downsize some more manufacturing capacity if it could do so in increments of say. Meredith may be focused on product differentiation. so cannot cost so cannot determine be calculated* unused capacity* *The absence of a cause-and-effect relationship makes identifying unused capacity for discretionary costs difficult. (100 – 80) × $9. Also. Management cannot determine the R&D resources used for the actual output produced to compare R&D capacity against. Meredith will save 30 × $8. Meredith may choose not to downsize because it projects sales increases that would lead to a greater demand for and utilization of capacity. 3. The amount and cost of unused capacity at the beginning of year 2003 based on year 2003 production follows: Amount of Unused Capacity Manufacturing.13-23 (15 min.100 Selling and customer service. 100 – 80. 13-13 . Meredith may have also decided not to downsize because downsizing requires a significant reduction in capacity.000 Discretionary Discretionary cost. 1. This is the maximum amount of costs Meredith can save in 2003. rather than 30 units. Not reducing significant capacity also helps to boost and maintain employee morale.100 = $243.

2. Snyder Corporation’s strategy in 2003 is cost leadership. Balanced Scorecard measures for 2003 follow: Financial Perspective (1) Increase operating income from productivity gains and growth. (4) customer satisfaction. (3) skill levels of employees. (2) time taken to perform key steps implementing the software. (2) time lost due to errors. Learning and Growth Perspective (1) Time required to analyze and design implementation steps.13-24 (15 min. and financial performance. Snyder’s consulting services for implementing sales management software is not distinct from its competitors. service company. 1. which are leading indicators of superior financial performance. (2) revenues per employee. for example. Internal Business Process Perspective (1) Time to complete customer jobs. (2) new customers. customer satisfaction. software implementation and overhead costs. The market for these services is very competitive. Snyder must deliver quality service at low cost. Improvements in these measures have a cause-and-effect relationship with improvements in internal business processes. (5) employee satisfaction and motivation. (3) customer responsiveness. To succeed.) Strategy. These measures indicate whether Snyder has been able to reduce costs and achieve operating income increases through cost leadership. (3) quality of job (Is system running smoothly after job is completed?) Improvements in these measures are expected to lead to more satisfied customers. balanced scorecard. lower costs. (4) hours of employee training. Improving productivity while maintaining quality is key. 13-14 . Customer Perspective (1) Market share. and superior financial performance. (3) cost reductions in key areas. Snyder’s strategy should result in improvements in these customer measures.

1.000 $120. $48.output 2002 output     relationship that existed in 2002    Cost effect of growth component = Software implementation labor costs that would be required in 2003 to produce 70 units instead of the 60 units produced in 2002.000 $ 465.360.000) Software implementation support costs ($4.775. The Growth Component Revenue effect of growth component Output  Actual units of Actual units of     output sold − output sold  × price   in 2003 in 2002 in 2002   $3.016.000 F = = (70 – 60) × $50.000 1.000 × 3) Total costs Operating income Change in operating income 2.000 375. Software implementation support costs 60 would not change since adequate capacity exists in 2002 to support year 2003 output and customers. $4.000 2.535.000 $ 585.000 × 3.000 × 60.000 × 90.000 ( × 70) labor-hours. Operating income for each year is as follows: 2002 Revenues ($50.13-25 (30 min.000. Software development costs are discretionary costs not directly related to output and.000 2003 $3. 13-15 .100 × 90) Software development costs ($125.000 2.000 369. $130. $63 × 32.000 2.000 = $500. hence.800.000.000 F Actual units of input or     capacity that would Actual units of   Input  have been used to produce inputs or capacity    × prices − used to produce   year 2003 output assuming in 2002  the same input .000 390.) Strategic analysis of operating income (continuation of 13-24).000 360. equal 35.000 into 2003.000 × 70) Costs Software implementation labor costs ($60 × 30. would not change in 2002 even if Snyder had to produce and sell the higher year 2003 output in 2002. assuming the 2002 input-output relationship continued 30.

000 – $50.000 – 30.000) × 70 = $140. the net decrease in operating income as a result of the price-recovery component equals: Revenue effect of price-recovery component $140.000 F Cost effect of growth component 300.000 U 9.000 U Software implementation support costs (90 – 90) × $4. the net increase in operating income as a result of the growth component equals: Revenue effect of growth component $500.13-25 (Cont’d.recovery component = Software implementation labor costs ($63 – $60) × 35.000 U In summary.000 U 13-16 .000 U Cost effect of price .000) × 90 Software development ($130.000 = 0 Cost effect of growth component $300.000 U Change in operating income due to growth component $200.000 – $125.000 U Actul units of inputs or capacity Input   Input   that would have been used  prices in prices in   year − year  × to produce year 2003 output   assuming the same input .output  2003 2002    relationship that existed in 2002 = = = $105.000) × $60 = $300.100 – $4.recovery = component Actual units  Output price Output price    in 2003 − in 2002  × of output    sold in 2003 = ($48.000 F The Price-Recovery Component Revenue effect of price .000 Software implementation support costs ($4.000) × 3 Cost effect of growth component In summary.000 U $129.000 = 0 Software development costs (3 – 3) × $125.000 U 15.000 U Change in operating income due to price recovery component $269.000 U Cost effect of price-recovery component 129.) The cost effects of growth component are Software implementation labor costs (35.

The productivity gains also allowed Snyder to be competitive and grow the business.000 $ 585.000 – 35.000 U $189. very likely because its product was not differentiated from competitors’ offerings.000 F $140.output relationship     that existed in 2002   The productivity component of cost changes are: Software implementation labor costs (32.000 F $120.000 $ 465. The company had to reduce selling prices while labor costs were increasing but was able to increase operating income by improving its productivity.) The Productivity Component Actual units of inputs or     capacity that would have been used   Actual units of  Input Productivity  inputs or capacity to produce year 2003 output  × prices in = − component  used to produce assuming the same  2003  year 2003 output  input .000 F = 0 = 0 $189. The unfavorable price recovery component indicates that Snyder could not pass on increases in labor-related wages via price increases to its customers.000) × $63 Software implementation support costs (90 – 90) × $4.360.535.100 Software development costs (3 – 3) × $130.000 U $189.000 F Change in operating income $3. The analysis of operating income indicates that a significant amount of the increase in operating income resulted from Snyder’s productivity improvements in 2003.000 3.000 F The change in operating income between 2002 and 2003 can be analyzed as follows: Income Statement Amounts in 2002 (1) Revenue and Cost Effects of Growth Component in 2003 (2) Revenue and Income Cost Effects of Cost Effect of Statement Price-Recovery Productivity Amounts Component Component in 2003 in 2003 in 2003 (5) = (3) (4) (1) + (2) + (3) + (4) Revenues Costs Operating income $3.000 U $200.000 2. 13-17 .000.000 U −− 129.000 F 300.13-25 (Cont’d.000 $500.000 2.000 F $269.000 Change in operating income due to productivity component = $189.775.

Effect of industry-market-size factors Of the 10-unit increase in sales from 60 to 70 units.000 decrease in selling price. price-recovery and productivity components (continuation of 13-25).500 ($2. and the remaining decrease of $1. Due to a lack of product differentiation.000 F 10 Effect of product differentiation Of the $2.000 (the growth component in Exercise 13-25) × Change in operating income due to cost leadership 7 10 140.000 per work unit.000 F Snyder has been very successful in implementing its cost leadership strategy.000 U $164.000 − $500) is due to a strategic decision by Snyder’s management to implement its cost leadership strategy of lowering prices to stimulate demand. However.000 F 105.000 U 129.000 U $189.500 × 70 Growth in market share due to productivity improvement and strategic decision to reduce selling price $200.) Analysis of growth.000 F 164.000) is due to a general decline in prices.000 U The change in operating income between 2002 and 2003 can then be summarized as Change due to industry-market-size Change due to product differentiation Change due to cost leadership Change in operating income $ 60. Snyder was able to take advantage of its productivity gains to reduce price. Snyder was unable to pass along increases in labor costs by increasing the selling price—in fact selling price declined by $2.000 F $ 35.000 F $224. The change in operating income due to a decline in selling price (other than the strategic reduction in price included in the cost leadership component) $500 × 70 units Increase in prices of inputs (cost effect of price recovery) Change in operating income due to product differentiation Effect of cost leadership Productivity component Effect of strategic decision to reduce selling price. and increase operating income. 1% or $500 (1% × $50.000 U 224. $1. The change in Snyder’s operating income from the industry market-size factor rather than from specific strategic actions is: 3 $200. 13-18 . 5% or 3 units (5% × 60) is due to growth in market size. gain market share. and 7 (10 − 3) units is due to an increase in market share.000 (the growth component in Exercise 13-25) × $60.000 F $120.13-26 (25 min.

000 Discretionary Discretionary cost.500. how has Caltex performed relative to its strategy in 2004? It appears from the scorecard that Caltex was successful in implementing its strategy in 2004. 1. The only target it missed was the market 13-19 . For example. so cannot determine be calculated* unused capacity* Software implementation support.) Balanced scorecard. Caltex’s strategy is to focus on “service-oriented customers” who are willing to pay a higher price for services. 13-28 (20 min. 90 − 70. Not reducing significant capacity by laying off employees boosts employee morale and keeps employees more motivated and productive.13-27 (20 min. Snyder may have chosen to downsize additional software implementation support capacity if it could do so in. and learning and growth perspectives. It cannot reduce capacity further (by another 15 units to 60 units) because it would then not have enough capacity to perform 70 units of work in 2003 (work that contributes significantly to operating income). and financial success from product differentiation and charging higher prices for customer service. internal business. The focus of the scorecard is on measures of process improvement. There are some deficiencies that the subsequent assignment questions raise but. gasoline. Even though its product is largely a commodity product. 1. Snyder will save 15 × $4. market share. Does the scorecard represent Caltex’s strategy? By and large it does. This is the maximum amount of costs Snyder can save by downsizing in 2003. (90 − 70) × $4. Having concluded that the scorecard has been reasonably well designed. Snyder may choose not to downsize because it projects sales increases that would lead to greater demand for and utilization of capacity. 3. increments of 5. It achieved all targets in the financial. Snyder can reduce software implementation support capacity from 90 units to 75 (90 − 15) units. 2. say. Caltex wants to differentiate itself through the service it provides at its retailing stations. Management cannot determine the software development resources used for the actual output produced to compare against software development capacity.) Identifying and managing unused capacity (continuation of 13-24). abstracting from these concerns for the moment.100 Software development *The absence of a cause-and-effect relationship makes identifying unused capacity for discretionary costs difficult. so cannot cost.100 = $61. quality. Snyder may have also decided not to downsize because downsizing requires significant reduction in capacity. The amount and cost of unused capacity at the beginning of year 2003 based on work performed in year 2003 follows: Amount of Cost of Unused Unused Capacity Capacity 20 $82. the scorecard does focus on implementing a product differentiation strategy. rather than 15 units.

Caltex’s strategy is to focus on the 60% of gasoline consumers who are service-oriented not on the 40% price-shopper segment. and quick turnaround. The bottom line is that measuring “market share in the overall gasoline market” rather than in the “service-oriented customer” market segment is not a good scorecard measure. The scorecard measures focus on Caltex’s success in implementing this strategy. students may raise some questions about whether this is a good scorecard measure. Caltex should add measures of gas station performance such as cleanliness of the facility. Caltex should replace “market share in overall gasoline market” with “market share in the service-oriented customer segment” in its balanced scorecard customer measure. In fact. the current scorecard measures focus exclusively on refinery operations and not on gas station operations. should be measured on the balanced scorecard. and friendly customer service is well trained and satisfied employees. training and employee satisfaction are very important to Caltex for implementing its strategy.” not its market share in the overall market. the convenience store. Given Caltex’s strategy. Hence. turnaround time at the gas pumps.) share target in the customer perspective. To evaluate if it has been successful in implementing its strategy. employee interactions. Caltex should add more measures to tighten this linkage. The customer satisfaction measure would serve as a leading indicator of market share in the service-oriented customer segment. Many companies do random audits of their facilities to evaluate how well their branches and retail outlets are performing. Although there is a cause-and-effect link between internal business process measures and customer measures on the current scorecard. Caltex may also want to consider putting a customer satisfaction measure on the scorecard. 5. These measures are leading indicators of whether Caltex will be able to successfully implement its strategy and. the shopping experience at the convenience store. fast. The key to good. “serviceoriented customer. Caltex needs to measure its market share in its targeted market segment. 4. Untrained and dissatisfied employees will have poor interactions with customers and cause the strategy to fail. Caltex’s differentiation strategy and ability to charge a premium price is based on customer service. 13-20 . These measures would serve as leading indicators of customer satisfaction and market share in Caltex’s targeted segments. it should not be concerned if its market share in the price-shopper segment declines. so not achieving this target may not be as big an issue as it may seem at first. 3. 2. This measure should capture an overall evaluation of customer reactions to the facility. Caltex’s strategy is to grow by charging premium prices for customer service. Yes. Caltex is correct in not measuring changes in operating income from productivity improvements on its scorecard under the financial perspective. should not be measured on the scorecard. hence. Caltex should include some measure of employee satisfaction and employee training in the learning and growth perspective. hence. charging premium prices will probably cause its market share in this segment to decline.13-28 (Cont’d. Productivity gains per se are not critical to Caltex’s strategy and. At this stage. Requirement 3 gets at this issue in more detail. In particular. and the service provided by employees.

Therefore employee training and employee satisfaction should appear in the learning and growth perspective of the scorecard. 1. For example. Lee will have more capacity available to it. Although it achieved targeted performance in the learning and growth and internal business process perspectives. Lee’s scorecard does not provide any explanation of why the target market share was not met in 2004. Lee must 13-21 . 2. The key to managing costs is dealing with the high fixed costs of Lee’s automated manufacturing facility. To reduce costs per unit. The key to achieving higher quality is reducing defects in its manufacturing operations. and availability.13-29 (30 min. Lee’s costs will not automatically decrease because many of Lee’s costs are fixed. Lee should include a measure of employee satisfaction to the learning and growth perspective and a measure of new product development to the internal business process perspective. service. Lee considers training and empowering workers as important for implementing its highquality. Lee can then evaluate if improving employee-related measures results in improved internal-business process measures. low-cost strategy. quality. Adding new product development measures to internal business processes is also important. 3. The scorecard correctly measures and evaluates Lee’s broad strategy of growth through productivity gains and cost leadership. that subsequent assignment questions will consider. market share and financial performance. of course. Of course if this strategy is to work. Instead. It should measure how well its printers match up against other color laser printers on the market. Lee’s strategy is to produce and sell high quality laser printers at a low cost. The focus of its current scorecard measures is on processes and not on people and innovation. Lee should measure customer satisfaction with its printers on various dimensions of product features. The key question is how Lee will obtain value from this capacity.) Balanced scorecard. There are some deficiencies. The market for color laser printers is competitive. One important way is to use the capacity to produce and sell new models of its products. It appears from the scorecard that Lee was not successful in implementing its strategy in 2004. Lee would have to either produce more units or eliminate excess capacity. This is critical information for Lee to successfully implement its strategy. Was it due to poor quality? Higher prices? Poor post-sales service? Inadequate supply of products? Poor distribution? Aggressive competitors? The scorecard is not helpful for understanding the reasons underlying the poor market share. As Lee reduces defects. Lee has not had the success it targeted in the market and has not been able to reduce fixed costs. price. These measures would then serve as leading indicators (based on cause-and-effect relationships) for lower market share. Lee may want to include some measures in the customer perspective (and internal business process perspective) that get at these issues. it significantly missed its targets in the customer and financial perspectives.

Hence.develop new products at the same time that it is improving quality. the scorecard 13-22 .

140.) should contain some measure to monitor progress in new product development.000. Lee’s management should first focus on using the newly available capacity to sell more product.000 2005 $2. Lee’s management must take actions such as selling equipment and laying off employees.000) Selling & customer service costs ($7 × 51. management should try to downsize in a way that would not hurt employee morale.600. Halsey offers a wide selection of clothes and excellent customer service.360. The Growth Component Revenue effect of growth = component  Actual units of Actual units of  Output    output sold − output sold  × price   in 2004 in 2005 in 2004   = (40.000 357. Halsey is following a product differentiation strategy. $41 × 40.300 F 3. As quality improvements occur.000. But how can management lay off the very employees whose hard work and skills led to improved quality? If it did lay off employees now. If it cannot do so and must downsize. $59 × 40. $6.000 296. To reduce costs.400.000) Costs Costs of goods sold ($40 × 40. costs ($250 × 980. $240 × 850) Total costs Operating income Change in operating income $2.000). Recall that the key to improving quality at Lee Corporation is training and empowering workers. Operating income for each year is as follows: 2004 Revenues ($60 × 40.000 1.000) Purchasing & admin.640.000 2. 2.700 $ 198. Improving quality and significantly downsizing to eliminate unused capacity is difficult. quality improvements will not automatically lead to lower costs. 1. Improving quality without developing and selling new products (or downsizing) will result in weak financial performance.000 2. will the remaining employees ever work hard to improve quality in the future? For these reasons.000 − 40.202.300 $21.000 204. capacity will be freed up.000) × $60 = $0 13-23 .) Strategic analysis of operating income. Halsey’s strategy is to distinguish itself from its competitors and to charge a premium price. but because costs are fixed.000 $ 219.90 × 43. such as through retirements and voluntary severance. 13-30 (35 min.700 245.13-29 (Cont’d. 4.000 1.

000 − 51. The cost effects of growth component are: Costs of goods sold Selling & cust. costs Purch.) Actual units of input or     capacity that would Actual units of   Input Cost effect  have been used to produce inputs or capacity   × prices of growth =  − to produce  year 2005 output assuming  component in 2004  the same input .000 U $0 0 $0 13-24 .000 − 40.-serv.recovery = component Actual units  Output price Output price    in 2005 − in 2004  × of output    sold in 2005 = ($59 − $60) × 40.output 2004 output     relationship that existed in 2004    Pieces of clothing that would be required to be purchased in 2005 would be the same as that required in 2004 because output is the same between 2004 and 2005. the net effect on operating income as a result of the growth component equals: Revenue effect of growth component Cost effect of growth component Change in operating income due to growth component The Price-Recovery Component Revenue effect of price . & admin.13-30 (Cont’d. Purchasing and administrative costs and selling and customer-service costs will not change since adequate capacity exists in 2004 to support year 2005 output and customers. costs Cost effect of growth component (40.000 = $40.000) × (980 − 980) × $40 = $7 = $250 = $0 0 0 $0 In summary.000) × (51.

costs (850 − 980) × $240 = 31.000 × 51.90 = $55.000 − 40.-serv.100 F 9.000 × 980 = = = $40.output    2005 2004  relationship that   existed in 2004 × 40.100 U Cost effect of price . costs ($6. the net decrease in operating income as a result of the price-recovery component equals: Revenue effect of price-recovery component Cost effect of price-recovery component Change in operating income due to price-recovery component The Productivity Component Actual units of     inputs or capacity that    Actual units of would have been used  Input  Productivity  inputs or capacity = − to produce year 2005  × prices in component  used to produce 2005 output assuming the same   year 2005 output   input .100 U $65.90 − $7) Purchas.000 − 51.200 F Change in operating income due to productivity component$86.13-30 (Cont’d. costs (43. costs ($240 − $250) Total cost effect of price-recovery component In summary.-serv.recovery component = Costs of goods sold ($41 − $40) Selling & cust.000) × $6.) Actual units of inputs or capacity Input  that would have been used  Input   to produce year 2005 output  prices in prices in  − ×  year year  assuming the same input . & admin.output relationship    that existed in 2004   The productivity component of cost changes are: Costs of goods sold (40.000) × $41 = 0 Selling & cust.000 U 25.100 U 13-25 .400 F $40.800 F $25.200 F Purchasing & admin.000 U 5.

000 $357.000 $0 0 $0 $40. Thus. 13-30 Excel Application Strategy.300 Change in operating income 4. The analysis of operating income indicates that a significant amount of the increase in operating income resulted from productivity gains rather than product differentiation.360. The company was unable to charge a premium price for its clothes.) The change in operating income between 2004 and 2005 can be analyzed as follows: Income Statement Amounts in 2004 (1) Revenue and Cost Effects of Growth Component in 2005 (2) Revenue and Cost Effect Income Cost Effects of of Statement Price-Recovery Productivity Amounts Component Component in 2005 in 2005 in 2005 (5) = (3) (4) (1) + (2) + (3) + (4) Revenues Costs Operating income $2. Halsey could not pass on increases in purchase costs to its customers via higher prices.400.000 2.100 U $65. despite the fact that operating income increased by more than 10% between 2004 and 2005.000 $60 $40 51. Balanced Scorecard.202. product differentiation strategy. the strategic analysis of operating income indicates that Halsey has not been successful at implementing its premium price.000 $296.000 2.000 2005 40.400 F $2.90 13-26 .13-30 (Cont’d.100 U $21. and Strategic Profitability Analysis Halsey Company Original Data 2004 Pieces of clothing purchased and sold Average selling price Average cost per piece of clothing Selling and customerservice capacity Selling and customerservice costs Selling and customerservice capacity cost per customer 40.000 U 25.000 $ 198. Halsey must either reconsider its product-differentiation strategy or focus managers on increasing margins and growing market share by offering better product variety and superb customer service.300 F $ 86.400 F $ 86.000 $59 $41 43.700 $ 219.700 $7 $6.140.

00) $(31.13-30 (Cont’d.000 850 $204.400 Income Statement Amounts in 2005 $2.000 2.000 $250 $2.360.100) (9.000 2.000 $198.700 204.000 296.000 2.800) 25.140.000 $240 $2.000 1.) Purchasing and administrative capacity Purchasing and administrative costs Purchasing and administrative capacity cost per distinct design Revenues Costs Direct materials costs Selling and customer service costs Purchasing and administrative costs Total costs Operating Income Revenue and Cost Effects of Growth Revenue effect of growth Cost effect of growth Direct materials costs Selling and customer service costs Purchasing and administrative costs Total cost-effect of growth Price-Recovery Component Revenue effect of pricerecovery Cost effect of price-recovery Direct materials costs Selling and customer service costs Purchasing and administrative costs Total cost-effect of pricerecovery Productivity Component Direct materials costs Selling and customer service costs Purchasing and administrative costs Cost effect of productivity component Strategic Analysis of Profitability Income Statement Amounts in 2004 $2.000 245.000 198.000) 40.202.200.400.100) Effects of Productivity Component $(86.140.202.200) $(86.700 $219.000 2.000 1.360.600.400) F F F Revenues Costs Operating Income 13-27 .400) 86.300 - $(40.000 (5.300 980 $245.640.400.000) 25.100 (65.100 U U F F U $0 $(55.700 219.000 357.000 Effects of Growth Component $Effects of PriceRecovery Component $(40.

Its sales did not keep up with the growth in market size. and the greater the repairs and maintenance the machines will need. 2. 3.000 F $1.000 F $400.000 13-28 . Winchester was unable to pass along increases in input prices to customers. repairs and maintenance.000) Net effect of product differentiation Effect of cost leadership (productivity component) Change in operating income $ 750.13-31 (25 min. 2. The price-recovery component is favorable because output prices increased faster than the input prices between 2004 and 2005. 13-32 (20 min.) Analysis of growth.000 unfavorable. Winchester’s strategy is to charge a premium price for its ball bearings.000 hours $20 per hour $40. and productivity components indicates that the $1. Winchester’s ball bearings are regarded as superior to its competitors. Effect of the industry-market-size factor Effect of product differentiation Price recovery component Change in market share ($300. Over time. while maintaining and increasing its market share.000 F 450. The productivity component is favorable because Winchester used fewer inputs to produce year 2005 output relative to what it would have used in 2004 (calculated using 2005 prices). and productivity components. the gain in operating income in 2005 is not consistent with the product differentiation strategy described in requirement 1.000 (5) = (3) × (4) Cost of unused repair and maintenance capacity 8. Winchester’s strategy is product differentiation. The growth component is favorable because Winchester sold more units in 2005 compared to 2004. and the product differentiation component is $50. Hence. 1. there is a clear cause-and-effect relationship between the output (quantity of gears produced) and repair and maintenance costs—the more gears that are produced. the greater the number of hours the machines will be run. The amount of repair and maintenance costs each year may not correlate directly to the quantity of gears produced.000 − $750. unused capacity.050. Winchester follows a product differentiation strategy in 2005. Rowland’s repair and maintenance costs are indirect engineered costs.) Engineered and discretionary overhead costs.000 hours 6. 1. however. $40.000 U 50.000 F The analysis of the growth.000 increase in operating income between 2004 and 2005 is due to growth in the market and to productivity gains.050. (1) Available repair and maintenance capacity 8 hours per day × 250 days × 4 workers (2) Repair and maintenance work actually done (3) = (1) − (2) Hours of unused repair and maintenance capacity (4) Repair and maintenance cost per hour.000 ÷ 2.000 hours 2.000 U 350. price-recovery. price-recovery.

500 hours $18 per hour $45.500 hours 2. and the greater the number of customer help-desk representatives needed. $36.000 hours 7. it does not regard the unused capacity as particularly excessive 3. to reduce costs of carrying unused capacity b. In this case.000 hours (8 hours/day × 250 days) (5) = (3) × (4) Cost of unused customer help-desk capacity in 2002 10. hence. 13-29 . Assume customer help-desk costs are discretionary costs. unused capacity. The more homes serviced.13-32 (Cont’d. cost of unused capacity in 2002 cannot be determined.000 ÷ 2. hence. the amount of unused capacity. Repair and maintenance costs would be discretionary if repair and maintenance are mostly of a preventive type that management can choose when to do. the greater the number of customer-service calls expected. it would negatively affect employee morale c. Cable Galore’s customer help-desk costs are indirect engineered costs. the amount of unused capacity. it may want to use the expertise of the repairs and maintenance staff in other areas such as process improvements d.000 2b. 1. 13-33 (20 min. The absence of a cause-and-effect relationship between homes serviced and customer-service calls means that Cable Galore cannot determine the customer help-desk resources used and.) Reasons why Rowland might want to downsize its repair and maintenance capacity are: a. (1) Available customer help-desk capacity 8 hours per day × 250 days × 5 representatives (2) Customer help-desk services actually used 1 45. customer help-desk. it projects greater demand for repairs and maintenance activity in the near future b.000 calls × hour per call 6 (3) = (1) − (2) Hours of unused customer help-desk capacity (4) Cost per hour. In this case. If repair and maintenance costs are discretionary costs. calculating unused capacity is much more difficult. the lack of a cause-and-effect relationship between output and repair and maintenance activity means that Rowland cannot determine the repair and maintenance resources used and. Assume customer help-desk costs are engineered costs. Over time. there is a clear cause-and-effect relationship between the output (number of subscribers or customers) and customer help-desk representatives needed and customer help-desk costs.) Engineered and discretionary overhead costs. to create a culture of streamlining processes and operating efficiently Reasons why Rowland might not want to downsize its repair and maintenance capacity are: a. 2a.

000 calls × hour per call 6 (3) = (1) − (2) Hours of unused customer help-desk capacity (4) Cost per hour (5) = (3) × (4) Cost of unused customer help-desk capacity in 2003 10. (1) Available customer help-desk capacity in 2003 (2) Customer help-desk services actually used 1 54. Direct materials 525.4 = 10.000 610.000 b.000 hours $18 per hour $18. Partial productivity measurement (Chapter Appendix) Berkshire Corporations partial productivity ratios in 2005 are as follows: = Quantity of output produced in 2005 Kilograms of direct materials used in 2005 Quantity of output produced in 2005 Direct manuf.000) calls in 2003. labor partial productivity = 525.000 = per unit of To compare partial productivities in 2005 with partial productivities in 2004.000 hours 9. a.) 1.000 × 1. labor . labor 13-30 . we first calculate the inputs that would have been used in 2004 to produce year 2005’s 525.000 units of output assuming the year 2004 relationship between inputs and outputs.86 units per kg.000 output units in 2005 = 7.000 Applying this 6% to the 900.000 hours 1.000 = = 6% Total subscribers in 2002 750.000 9.13-33 (Cont’d.hour 0.000 subscribers in 2003 means that Cable Galore received 54.4 = 630.26 units per labor .hours used in 2005 Direct materials partial productivity Direct manuf.500 hours (2004) × 375.) Telephone calls received in 2002 45. cost of unused capacity in 2003 cannot be determined.000 output units in 2004 = 450.000 output units in 2004 = 7. Assume customer help-desk costs are discretionary costs.000 output units in 2005 375.500 labor-hours = 450. Assume customer help-desk costs are engineered costs.500 × 1. For the reasons described in 2b.000 525.000 (6% × 900. 525.90 units capacity = = = Manufacturing overhead = partial productivity Quantity of output produced in 2005 Units of manuf.000 582. capacity in 2005 = 525.500 = 0. 55.000 kg (2004) × Direct manuf.000 kg. 13-34 (20 min. 3.

better incentives. capacity that would have been used in 2004 to produce year 2005 output = 525. lower labor turnover.000 10. labor . 3. Partial productivity measures can easily be compared over multiple periods.83 units Direct manufac. tell us how much total factor productivity changed. 2.000 units of capacity.000 = Kilograms of direct materials that would have been used in 2004 to produce year 2005 output Quantity of output produced in 2005 = = per kg 0. For example.) Manufacturing capacity = 600. or improved methods.000 unit of capacity 0. however. conclude that total factor productivity definitely increased from 2004 to 2005. they may specify bonus payments if partial productivity of direct manufacturing labor increases to 60 units of output per direct manufacturing labor-hour and if partial productivity of direct materials improves to 0.000 = 600.hours that would have been used in 2004 to produce year 2005 output Quantity of output produced in 2005 = 525. 13-31 . lower absenteeism. Berkshire Corporation management can use the partial productivity measures to set targets for the next year.875 units per The calculations indicate that Berkshire improved the partial productivity of all its inputs between 2004 and 2005 via improvements in efficiency of direct materials and direct manufacturing labor and by reducing unused manufacturing capacity.000 630. A major advantage of partial productivity measures is that they focus on a single input. Partial productivities cannot.90 units of output per kilogram of direct materials. hence. We can therefore. they are simple to calculate and easy to understand at the operations level. All partial productivity ratios increase from 2004 to 2005.500 = labor . and adequate capacity existed in 2004 to produce year 2005 output.hour 50 units per Manufacturing overhead partial productivity = Units of manuf. because manufacturing capacity is fixed. because partial productivity measures cannot be aggregated over different inputs.13-34 (Cont’d. labor partial productivity = Direct manuf. Management can then implement and sustain these factors in the future. Managers and operators can also examine these numbers to understand the reasons underlying productivity changes from one period to the next—better training of workers. Partial productivity calculations for 2004 based on year 2005 output (to make the partial productivities comparable across the two years) Quantity of output produced in 2005 Direct materials partial productivity 525.

000 525. total factor productivity increased 4% [(0.000 525. We need something to compare the 2005 TFP against.000 × $1. By itself.500 $2.000 × $1.500 × $25) + (582.26 − 0.75) 525. as a benchmark. TFP calculated using the inputs that Berkshire would have used in 2004 to produce 525. We use.050.000 × $1.25 units of output per dollar of inputs Using year 2005 prices.26 units per dollar of input is not particularly helpful.500 + $1.000 $2.500 + $262.000 = = $762. the 2005 TFP of 0.25] from 2004 to 2005.500 × $25) + (600.25) + (10.500 + $237. Benchmark TFP from 2004 Quantity of output produced in 2005 = Costs of inputs that would have been used in 2004 to produce 2005 output at year 2005 input prices = = 525.100.25) ÷ 0. Quantity of output produced in 2005 Costs of inputs used in 2005 based on 2005 prices 1.500 = 0. Using the current year’s (2005) prices in both calculations controls for input price differences and focuses the analysis on the adjustments the manager made in the quantities of inputs in response to changes in prices.75) 525. 13-32 .000 × $1.) Total factor productivity for 2005 using 2005 prices Total factor productivity (continuation of 13-34).000 (610.500 + $1.000 = 0.018.018. = 525.25) + (9.000 (630.000 = $787.26 units of output per dollar of input = 2.13-35 (25 min.000 units of output (calculated in requirement 1) at 2005 prices.

000].13-35 (Cont’d. HPD should use employee and customer satisfaction measures even though these measures are subjective.25 − $1.000 kgs. direct materials used decreases from 630. She has tried to understand the reasons for the poor scores and has been able to relate these scores to other objective evidence such as employee dissatisfaction with the new work rules and customer unhappiness with missed delivery dates. For example.500) ÷ 10.52% [(10. There is a cause-and-effect linkage between these measures and future financial performance. HPD should guard against imprecision and potential for manipulation.) Balanced scorecard.000 − 610. ethics. Berkshire reduces direct manufacturing labor input to produce 525. the Household Products Division (HPD) should include measures of employee satisfaction and customer satisfaction even if these measures are subjective. For a maker of kitchen dishwashers. Berkshire used relatively more of direct materials inputs (whose price had gone up less) and relatively less of direct manufacturing labor (whose price had gone up more). Recall that direct materials and direct manufacturing labor are substitutable inputs. A major advantage of TFP over partial productivity measures is that TFP combines the productivity of all inputs and so measures gains from using fewer physical inputs and substitution among inputs. employee and customer satisfaction information is very important in evaluating the implementation of HPD’s strategy.20) ÷ $1. a decrease of 3.20] from 2004 to 2005.) 3.17% [(630. If HPD’s strategy is correct and if the scorecard has been properly designed. while direct materials costs increased by 4. the specific “Standards of Ethical Conduct for Management Accountants” (described in Exhibit 1-7) that the management account should consider are listed below.500 hours in 2004 to 9. 13-33 .000 kgs.000 units of output from 10. One of the pitfalls to avoid when implementing a balanced scorecard is not to use only objective measures in the scorecard. To improve total factor productivity in 2005. In assessing the situation. measured in both years using 2005 prices. 1. employee and customer satisfaction are leading indicators of future financial performance.000) ÷ 630. a decrease of 9. Patricia Conley appears to be aware of this. Correspondingly. Total factor productivity increased because Berkshire produced more output per dollar of input in 2005 relative to 2004..500 hours in 2005. 2. to 610. The gain in TFP occurs because Berkshire increases the partial productivities of each individual input (as calculated in Exercise 13-34) and seeks the least expensive combination of inputs to produce the output.500 − 9. Yes. Of course. Note that direct manufacturing labor costs increased by 25% [($25 − $20) ÷ $20] from 2004 to 2005. Incorrect reporting of employee and customer satisfaction ratings to make divisions performance look good is unethical. 13-36 (25 min.17% [($1.500].

000 $65.500 $ 96. Objectivity The management accountant’s standards of ethical conduct require that information should be fairly and objectively communicated and that all relevant information should be disclosed. Integrity The management accountant has a responsibility to avoid actual or apparent conflicts of interest and advise all appropriate parties of any potential conflict.250 $ 81. The downsizing plan would be acceptable as the required subsidy is less than 20% of the current subsidy.) Competence Clear reports using relevant and reliable information should be prepared. The Standards of Ethical Conduct require the management accountant to communicate favorable as well as unfavorable information. It is unethical for Conley to change the employee and customer satisfaction ratings in order to make the division’s performance look good. Conley should consider resigning from the company and not engage in unethical behavior.700. Conley should indicate to Emburey that the employee and customer satisfaction ratings are. 1.13-36 (Cont’d. indeed.000 96. violates the responsibility for integrity.250 13-34 .60) + $230 beverages/desserts] × 250 days Cost of supplies: $192.500 × 50% Cost of downsizing plan: Wages and fringe benefits1 Utilities and equipment maintenance Annual cost of supplies Total costs Annual revenue Mayfair downsizing plan subsidy 1 $192.000 compared to $16. adapted). after taking all these steps. Conley should raise the matter with one of Emburey’s superiors.500 192. Conley may be tempted to report better employee and customer satisfaction ratings to please Emburey.000 + (25% × $65. If Emburey still insists on reporting better employee and customer satisfaction numbers. appropriate.000) = $81.) Downsizing (CMA. $15.250 30. however. This action. 13-37 (35 min. modifying employee and customer satisfaction ratings to make division performance look good would violate the standard of objectivity.500 $ 15. If. there is continued pressure to overstate employee and customer satisfaction ratings. From a management accountant’s standpoint.250 207. Preparing reports on the basis of incorrect employee and customer satisfaction ratings in order to make the division’s performance look better than it is violates competence standards. calculated as follows: Under downsizing plan Annual revenue: [(150 sandwiches × $3.

000 $126.04) Plus: Rent4 Total payments to Mayfair Cost to Mayfair: Fixed costs (utilities and equipment maintenance) Mayfair’s Wilco Foods proposal subsidy [(66 entrees × $5) + (94 sandwiches/salads × $4) + $300] × 250 days ($1.500 210.700 2.500) $210.140 less than the downsizing plan: $15.13-37 (Cont’d.000 compared to $9.000)] Utilities & equipment maintenance Cost of supplies ($210.000 293. The Wilco Foods proposal is more advantageous to Mayfair Corporation than the downsizing plan as the subsidy at the projected volume is $5.000 $ 83.860 13-35 .500 $ 8.000 20.000 + (25% × $110.860.140 30.000 126. The calculations follow: Revenue to Mayfair: Wilco revenue1 Less: Breakeven sales2 Revenues in excess of breakeven sales Revenues payable to Mayfair3 ($203.140 12.000 $137.000 $ 9.000 monthly payment × 12 months) ÷ (1 − 75%) contribution margin ratio 3 Revenues in excess of breakeven sales × 4% 4 $1.000 monthly payment × 12 months 1 2 $251.500 30.000 × 60%) Total costs Annual revenue Mayfair current operations subsidy Mayfair Corporations subsidy limitation 20% of current subsidy (20% × $83.000 $203.500 48.500 $16.) Under current cafeteria plan Annual revenues [(100 entrees × $4) + (80 salads/sandwiches × $3) + $200 beverages/dessert] × 250 days Cost of supplies (60% × $210.500 × 0.000) Computation of subsidy limitation Current operation Wages and fringe benefits [$110.

Refer to the Operational Goals. 2a. Internet Exercise The balanced scorecard highlights four key perspectives of performance: financial. and objectives. The Internet Exercise on the Web will be updated periodically so that it is current with the latest information available on the subject organization's Web site. 11th ed. Students can click on Cost Accounting. 11th ed.com/horngren. A printout copy of the Internet exercise for this chapter as of early 2002 appears below. After the initial registration. Mark’s Work Warehouse Ltd. Did Mark’s Work Warehouse meet its five operational goals for the year? What is the area of greatest concern? 3. Review senior management performance objectives for next year and identify objectives that fit each of the balanced scorecard performance perspectives.prenhall. you will have a personal login ID and password to use to log in. internal business process. forecasts. and senior management objectives for the upcoming year.Chapter 13 Internet Exercise The Internet exercise is available to students only on the Prentice Hall Companion Website www.com and click on the “Corporate” link. which links to the Web site of a company or organization. Did Mark’s Work Warehouse customer-service performance rating improve in the current year? What is the goal for next year? 13-36 .” 1. Refer to the Other Indicators. Faculty link. A printout of the solution to the Internet exercise for this chapter as of early 2002 follows. It also provides a “postmortem” on whether it achieved the prior year’s goals. followed by “Investor Information. To access Mark’s Work Warehouse’s (MWW’s) latest annual report go to www. and learning and growth. forecasts. is available to instructors from the Companion Website's faculty view. The solution to the Internet exercise. customer. The exercise and solution provide instructors with an idea of the content of the Internet exercise for this chapter..’s awardwinning annual report publishes corporate goals. which will also be updated periodically. and then register once to obtain your password through the online form.marks. click on Cost Accounting. To access the solution. and access the Internet Exercise for the chapter. What is the purpose of operational goals? 2b..

Timely and accurate internal and external financial reporting. Divisional pretax profit growth of 15% in Mark’s Division. Balanced Scorecard Perspectives Financial Perspective:         Consolidated pre-tax profit of $18.2 million. Major transaction or series of transactions that cause the Company’s share price to increase by 30%.Internet Exercise (Cont’d. Division net front-line contribution up $1.000. Internal Business Process Perspective:     Mark’s Division total sales dollars per front-line and back-line staff full-time equivalent. Customer Perspective:  Planned new relocated and refurbished stores. Divisional pretax profit up by $0. It failed to meet the turnover goal for each of its three divisions. Manage the Company’s tax affairs on budget. Inventory turnover is the area of most concern at the time of preparing the 2001 Annual Report (report for the year ended January 27. Learning and Growth Perspective:  Keep the company technologically current and senior management informed about future retail technology.03 to 1.) Solution to Internet Exercise 1. “Operational goals are key items that the Company monitors to gauge its progress towards the achievement of its Strategic Plan and Mission. Consolidated 12-month rolling funded debt-to-equity ratio 1. Systems Steering Committee projects and departmental operations capital expenditures on budget. $243.9 million in Dockers Stores Division. 2001).” 2b. 13-37 . Divisional pretax profit up by $1.3 million in Work World Division. Mark’s Work Warehouse met a portion of its operating goals. Operational goals and other indicators also provide data that can be benchmarked against our competitors in the industry.8% gross margin rate in Mark’s Division. Divisional gross margin of $156 million and 41. 2a.7 million in Work World Division.

2% 2.5 10. Mark’s Work Warehouse’s customer service performance rating dropped from 92. Inventory turnover (times) Mark’s Division Work World Division Docker’s Stores Division $258 $235 $446 Actual $259 $221 $333 Evaluation Yes No No 1.0% 2.8 Yes Yes No No No 3.2% 4.6% 4. 13-38 . Front-line contribution as a percent of corporate store sales 4. Gross margin return on investment (times) Mark’s Division Work World Division Docker’s Stores Division 3.9 1.9 6.2 1.9% 1.9 10.8 0.3 2. Its goal for 2002 is a rating of 94%.) Goal 1.1% in fiscal year 2001.7 0.Internet Exercise (Cont’d. Franchise royalties and other less bad debts as a percent of franchise sales: Mark’s Division Work World Division 5.4 1.6% in fiscal year 2000 to 91.5% Yes Yes No No 6.1 1.9 1. Sales per average retail square foot Mark’s Division Work World Division Docker’s Stores Division 2.

the company has gone so far as to literally “buy the farm” to vertically integrate its food supply chain.Chapter 13 Video Case The video case can be discussed using only the case writeup in the chapter. Alternatively. any outlet offering food could be considered equivalent. McDonald’s has entered into agreements with Wal-Mart to put smaller. (Your own local community may bear this out – how often do new restaurants open?) At the corporate level. depends on the partner. Wal-Mart exerts considerable bargaining power over its suppliers. Customers have tremendous bargaining power since they have so many food choices available. Potential Entrants: Barriers to entry in the restaurant business are relatively low.000 stores in 114 countries. The case questions challenge students to apply the concepts learned in the chapter to a specific business situation. For example. The videotape can be obtained by contacting your Prentice Hall representative. Competitors: There are numerous competitors in the quick-service restaurant category. to small. When hunger strikes. and Taco Bell. may offer concessions and very favorable terms in order to attract them. from large corporations such as Burger King. McDonald’s is in good position to negotiate its terms with suppliers. local establishments in each community where McDonald’s has a store. In the past. McDonald’s acknowledges that few people plan a meal out at one of their stores. Convenience stores and gas station markets would fit in this category. scaled-down restaurants in some of its stores. Alternatively. McDonald’s must take action to keep employees happy and committed to their jobs so they don’t leave. a shopping mall may strongly desire McDonald’s presence in its food court. Bargaining Power of Customers: This can be viewed from two angles – consumers and business partners. Bargaining Power of Input Suppliers: With close to 25. the analysis changes. 13-39 . The cost of facilities is not so great as to discourage new entrants. and therefore. it is very difficult to attract qualified workers. instructors can have students view the videotape of the company that is the subject of the case. keeping competition fierce. they get to add McDonald’s name to their client list. on the other hand. The bargaining power of business partners. managers are not so concerned with new entrants since McDonald’s has so many stores (close to 25. If you consider labor (employees) in the category. Labor and food are the largest recurring costs in store operations. For the supplier. If you also consider impulse food purchases outside of regular meal times. so they try to locate them in high-traffic areas. Equivalent Products: Customers can choose to cook meals at home or buy grocery store take-out meals instead of visiting a restaurant.000) in communities of all sizes around the globe. With the current period of low unemployment. Making customers happy is critical to the company’s continued success. McDONALD’S CORPORATION: THE BALANCED SCORECARD 1. McDonald’s wants to be the choice. Wendy’s. It is easy to copy a new product or match a price change.

) Strongest force: This could be an interesting class debate. Service times at the drive-thru. Several of the company’s strategies (#2 and #5 in the case) point to product differentiation through product innovation. pizza and pasta (people didn’t want to wait for a pizza at McDonald’s). When questioned about this topic in a recent interview. and during lunch are tracked. Their products could be considered similar to competitors’ offerings. Without them. Perhaps the class can name some recent examples – the McDLT. Another factor is linkage to vision and strategy. There is constant pressure to drive costs out of operations. Cost leadership is also apparent in McDonald’s actions. and employee satisfaction. and actual versus needed hours. Labor data are reported for the following: crew turnover. and scales are used to weigh french fry portions. front counter. McDonald’s management was hesistant to make a choice of one over the other. so lower selling prices and high-quality products rather than unique products or services provide a measure of competitive advantage. and Value Meals are just a few. due to their size. 13-40 . Happy Meals. 3. Special dispensers mete out the precise amount of soda for each cup size. there may be mixed class responses here. For example. Challenge students to justify the measures in their scorecard in light of these factors. overtime. average hourly rates. customer satisfaction. McDonald’s tracks market share. One of the key factors in deciding what goes onto the McDonald’s scorecard is whether the items under consideration can be controlled by the store manager. Restaurant food waste is tracked. 2. Corporate management has indicated in interviews with the case writer that they are not all that concerned about the threat of new entrants. Customers arguably drive store success. The popularity of bagels has triggered McDonald’s to begin testing bagel sandwiches in a few of its company-owned stores. there would be no McDonald’s. labor as a percent of sales. See if you can get students to think beyond financial measures such as sales or net income as performance indicators.Video Case (Cont’d. Weakest force: Again. and standards exist for the preparation of each food item on the menu.