ACCG3001

Organisational Planning and Control

Session 1, 2020
Tutorial In-Class Exercise – Student Handout
WEEK 8
STUDENT NAME: SIANG KHIAN SIM SID: 45543011

TUTORIAL DAY / TIME: 12PM THURSDAY TUTOR: NADINI

FOLEO FONES CASE STUDY – Chapter 7:

Assume you are the management accountant for the Foleo Group, and nine months ago you helped Tracey Chen introduce
a performance measurement system across the organisation based on ROI as the sole measure. Tracey has now asked you
to assist her in assessing the effectiveness of the new system since its introduction for each of the business units and H.O.
Departments. To begin the process, she asks you to analyse the Foleo Accessories business - Tracey is quietly confident
that performance has improved, considering the bonus payments across the business unit have been paid out each month
since the system was implemented. You collect the data you need for your analysis of the performance of Foleo
Accessories for the last nine months, compared with the same period last year, and compile it on the document below.
Foleo Accessories Comparison Performance Report for 9 months:
Same period
  Last 9 months
last year
Sales Revenue: $1,609,875 $1,685,818
Variable Costs $998,123 $1,005,823
CONTRIBUTION MARGIN OF FOLEO ACCESSORIES $611,752 $679,995
Less: Controllable Fixed Expenses $62,785 $62,412
PROFIT MARGIN CONTROLLABLE BY FOLEO ACCESSORIES $548,967 $617,583
Less: Traceable Fixed Expenses $217,333 $216,570
PROFIT MARGIN TRACEABLE TO FOLEO ACCESSORIES $331,634 $401,013
Less: Common Fixed Expenses $45,000 $45,000
NET PROFIT BEFORE TAX $286,634 $356,013

Extract from Foleo Accessories Balance Sheet Comparison:

Same period last
  Current
year
Assets:    
Current Assets $1,672,145 $2,505,129
Fixed Assets $4,277,208 $5,132,650
TOTAL ASSETS $5,949,353 $7,637,779
Liabilities:    
Current Liabilities $1,070,674 $1,071,384
Long term Liabilities $3,150,000 $3,300,000
TOTAL LIABILITIES $4,220,674 $4,371,384

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(a) From the data you have collected and knowing that Foleo uses total assets less current liabilities to calculate the
Invested Capital component for ROI, calculate the ROIs for current period and for the same period last year for Foleo
Accessories.
(HINT: Use the profit controllable by Foleo Accessories for your calculations as you are evaluating the business unit.
Show all your workings to maximise your marks.)
CURRENT YEAR
INVESTED CAPTIAL = 1728679
ROI = 286634/1728679 = 0.166 = 16.6%

SAME PERIOD LAST YEAR

INVESTED CAPTIAL = 3266395
ROI = 356013/ 3266395 = 0.109 = 10.9%

(b) From your analysis above, prepare a brief report for Tracey Chen explaining the ROI results in relation to the
Performance Report and Balance Sheet extract, and recommending a course of action.
(HINT: Explain why the ROI results are/are not consistent with the business unit’s current and past performance in
generating profits. Ensure you provide a recommendation.)

The profit for the pervious year was higher but that does not mean that the financial performance was better, as it used
a much larger amount of invested capital to earn the profit. As seen for the pervious twice as many assets were used to
gain the profit. For the current its financial performance was better even though less profit was earned as indicated by
the ROI analysis above. The ROI can improve by increasing selling prices, increasing sales volume and decreasing
expenses.

(c) After reading your report, Tracey is concerned and has asked you to calculate the Residual Income measure for both
time periods to see if it more clearly reflects the performance of Foleo Accessories. She advises you that the current
required rate of return on the Foleo Group’s invested capital is 9.2%.
(HINT: Use the same definitions for profit and invested capital as you did in part (a), and show all your workings to
maximise your marks.) (1.2 marks)

Current year RI = $286634 – ($1728679 * 0.092) = $127595.53

Pervious Year RI = $356013 – ($3266395 * 0.092) = $59184.66

(d) Are these RI measures consistent with the ROI measures you calculated in part (a)? (0.2 mark)

No as RI includes the organisation’s required rate of return on invest capital.

(e) Unhappy with the results of your analysis, Tracey finally asks you to calculate the EVA for each time period. Knowing
you will need additional information, she provides the below financial data relating to Foleo Group Limited.
(HINT: You will need to calculate the WACCs for each time period before you can determine the EVAs, as interest rates
have fluctuated. Show all your workings to maximise your marks.) (1.6 marks)

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 Same period
  Current
last year
After-tax cost of debt capital 4.40% 3.25%
Market value of debt $4,178,467 $4,152,815
Cost of equity capital 4.00% 4.30%
Market value of equity $950,774 $2,939,755
Tax rate 30% 30%

Current year WACC = (4.40% * 4178467) + (4% * 950774) / (4178467+950774) = 0.0433 = 4.33%
EVA = 286634 – (1728679* 4.33%) = $211782.20

Pervious year WACC = (3.25% * 4152815) + (4.3% * 2939755) / (4152815 + 2939755) = 0.0417 = 4.17%
EVA = 356013 - (3266395* 4.17%) = $219804.33

(f) Are these EVA measures consistent with the measures you calculated earlier? Why or why not?
(HINT: Ensure you refer to your analysis in your explanation.)

No , as the definition of net operating profit after tax is not necessarily the same as the measure of profit used in RI
measure. Secondly the WACC is used in EVA whereas in RI this is not always the case as the imputed interest rate is
used, which is the company’s required rate of return. Sometimes this is the WACC but not all in cases. Lastly in EVA,
capital employed is calculated as the company’s total assets, less non- interest-bearing current liabilities. In RI and ROI
invested capital is defined in a variety of ways. In the current year the company paid the shareholders $ 211782.20
where as in the previous year the company paid shareholders $219804.33.