Ban in

q q
347 Thecorrectansweris:ROIis a relativemeasure,thereforesmallinvestmentswitha high Marks

rate of returnmay appear preferableto a largerinvestmentwithlowerROI.However,the (d) ROI/RIafter investment:
largerinvestmentmay be worthmoreinabsoluteterms. ROIcalculation 2
Thedistractersare allexamplesoflimitationswhichare commonto bothROIand RI. RIcalculation 1
Commentsand conclusion 2
348 Thecorrectansweris:Manager1willshowa higherRIbecause of the sizeof the division
5
rather than superiormanagerialperformance.
(e) Behaviouralissues:
Thefirsttwodistractersare examplesof limitationswhichare commonto both ROIand RI. ROIof investment– markper validpoint Max 4
Distracter3 is false,RItiesinwithNPV. 20
349 Biscuits and Cakes
(a) Annualisedreturn on investment(ROI)
Workbookreference.Returnon investmentand residualincomeare coveredinChapter 20. ROI=(Netprofit/ Netassets) ×100%
Toptips. Parts (a) and (b)ask you to calculatethe annualisedreturnon investmentand residual DivisionB
income.Rememberto multiplythe monthlynet profitfigureby 12,to reflectthat there are 12
monthsina year. Netprofit=$311,000×12months=$3,732,000
Part (c)asks you to concludeas to whetherthe twodivisionshave performedwell,using ROI =($3,732,000/ $23,200,000)×100%
additionalcalculationsas necessary. Inorderto fairlyassess performance,take timeto =16.09%
recalculateROIand/or RIusingcontrollableprofit. DivisionC
Easymarks.Thereare fivemarksup forgrabs inparts (a) and (b)forcalculatingthe annualised Netprofit=$292,000×12months=$3,504,000
ROIand RI. ROI =($3,504,000/ $22,600,000)×100%
Examiningteam's comments.Thiswas a straightforwardperformancemeasurementquestionin =15.5%
a divisionalcontext.Parts (a) and (b)wererelativelystraightforward.
(b) Annualisedresidualincome(RI)
Inpart (c),strongercandidates realisedthat, inorderto discussthe performanceof the divisions DivisionB DivisionC
well,they needed to recalculatethe ROIand/or RIusingcontrollableprofit.Wherecandidates did A $'000 $'000
this,they generallyaccompaniedit withsomegood discussionand scoredfullmarks. N
S
W Netprofit(part (a)) 3,732 3,504
G
Weakeranswersperformedothercalculationson the twodivisionsand gave somegeneral E

R
HG
Less:imputedinterestcharge: H
commentary,eventhoughthe questionasked fora discussion'usingboth ROIand RI'. $23.2m×10% (2,320) nil

Inpart (e)candidates weresupposedto identifythe fact that changingthe basis forcalculating S $22.6m×10% nil (2,260)
ROIand usingthisforperformancemeasurementwithoutchangingthe target ROIwouldcause 1,412 1,244
managers to be demotivated.Manycandidates answeredthiswell,althoughsomesimply (c) Performancebased on ROI
discussedthe generalproblemsencounteredwhenusingROI,whichwererelevantto a degree
but shouldn'thave been the soleanswer. TheROIscalculatedforeach divisioninpart (a) are both significantlybelowthe company's
target ROI(20%).Thiswouldsuggest that both divisionsare performingpoorly.
However,both divisionsare nowrequiredto deduct a share of head officecosts intheir
Markingscheme respectiveoperatingstatements beforearrivingat 'net profit'whichis then used to
calculateROI.Thecompany'starget ROIhas not been reducedto take account of these
Marks uncontrollablecosts.
(a) ROI/RIcalculations: Usingthe oldmethod(priorto head officecosts beingrecharged to divisions),ROIforboth
ROIforB 1 divisionswouldhave exceededthe 20%target, and increasedon ROIsforthe last three
ROIforC 1 months(DivisionB:22%pa, DivisionC: 23%pa) – showingthat both divisionshave actually
2 improvedtheir performance.
(b) ROI/RIdiscussion: ROIusingthe oldmethod
RIforB 1.5 DivisionBnet profit=($311,000+$155,000)×12=$5,592,000
RIforC 1.5 DivisionBROI=$5,592,000/ $23,200,000×100%=24.1%
3
(c) Discussion: DivisionC net profit=($292,000+$180,000)×12=$5,664,000
ROIdiscussion 2 DivisionC ROI=$5,664,000/ $22,600,000×100%=25.06%
RIdiscussion 2 Performancebased on RI
ExtraROIcalculationunderoldmethod 1 DivisionBand DivisionC both have healthyRIfiguresof $1.4millionand $1.2million
Validconclusiondrawn 1 respectively.Thesefiguresare impressivewhenyou considerthat they are based on net
6 profitsas opposedto controllableprofits.
Answers 263 264 PerformanceManagement(PM)
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q q
However, thecompany's costofcapitalof10%issignificantly lowerthanthetargetreturn Thequalityof answersto part (c)was reallypoor. Thequestionwas lookingfora coupleof key
oninvestment (20%).Thismakes theresidual income figureshowa morepositive position. points,forexample,that includingfixedcosts guarantees a profitforthe sellerbut invites
(d) Division
B'srevised annualisednetprofitandopening netassetsafterinvestment manipulationof overheadsand passes on inefficienciesfromone part of the businessto another.
Depreciation=($2,120,000 – $200,000)/ 48months =$40,000permonth Also,that thisstrategy causes fixedcosts of one divisionto be turned intoa variablecost for
another division.
NetprofitforJuly=$311,000 +($600,000×8.5%)– $40,000=$322,000
Annualised netprofit= $322,000×12=$3,864,000 Similarly,part (d)rarelyproducedanswersscoringfullmarks.Itasked whetherretailstores
shouldbe allowedto buy infromoutsidesuppliers.Keypointsinany answershouldhave been
Opening netassetsafterinvestment =$23,200,000 + $2,120,000=$25,320,000 that the overallprofitabilityof the companyis key, as is goal congruence;these pointswere
Division
B ROI rarelymade. Thankfully,many candidates did spot the moreobviouspointssuch as the fact that
the qualityand reliabilityof any externalsupplierwouldneed to be assessed.
ROI=(Netprofit/ Netassets) ×100%
=$3,864,000 / $25,320,000 × 100%=15.26%
Division
Bwillnotproceed withtheinvestment asitwillcausea decrease inROI. Markingscheme
Division
B RI Marks
$'000
Netprofit 3,864 (a) Steel 1
Less:imputed interest
charge: Othermaterial 1
$25.32m ×10% (2,532) Labour 1
Residualincome 1,332 Variableoverhead 1
Basedontheabovecalculation, itisclearthatRIislower withtheinvestment.Thiswould Delivery 1
suggestthatthecompany should notproceed withtheinvestment andshows thattheuse Margin 1
ofROIasa performance measure islikelytoresultinthemanager ofDivision
Bmaking a 6
decisionthatisinthebestinterests ofthecompany asa whole. (b) Fixedcost 2
(e) Behavioural problems Margin 2
Staffinbothdivisionsareusedtoexceeding thetargetROIof20%andbeingrewarded for 4
doingso.Asa result ofincluding headofficecostsinthecalculation ofnetprofit,staffwill A
N (c) Coversallcost 1
seethattheirrespective divisions
arenolongermeeting thetargetROI,despite S
W Risk 1
G
performance actuallyimproving. E
R
HG
Fixedcost accounting 1
H
ThetargetROIshould berevised totakeaccount ofthetheseuncontrollable allocated Convertsa FCto VC 2

costs. S Max 4
Staffarelikelytobecome demotivated bythefactthattheyarenolonger meetingthe (d) Marketpricemay be temporary 1
targetROIdespite continuingtooperate atthesamelevelasbefore. Theymayfeelthat Brand 1
management havedeliberately alteredhowperformance ismeasured inordertoavoid Profitability 1
payingstaffbonuses forexceeding targets. Flexibility 1
Staffmaydeliberately workslowly andrefuse toworkovertime toshowtheiropposition to Control 1
thenewsystem. Thecompany should resolvethesituation assoonaspossible toavoida Motivation 1
decrease inproduction output andproduct quality. Performanceassessment 1
Max 6
350 Hammer 20
Workbook reference.
TransferpricingiscoveredinChapter20. (a) PriceNailwouldcharge under existingpolicy(cost plus30%)
Toptips.Donotforgettoexclude fixedcostsfromyourcalculations
inpart(a).Thequestion $
statesthatthecurrent
pricingpolicyisvariable
costplus30%. Steel(0.4kg/0.95(5%steelloss))×$4.00 1.68
Easymarks. Sixmarksareavailableinpart(d)fordiscussing
factorstoconsiderwhen Othermaterials($3.00×0.9 ×0.1) 0.27
purchasingfromoutsidesuppliers. Labour($10×0.25) 2.50
Variableoverhead($15×0.25) 3.75
Examiningteam'scomments. Thenumerical partstothequestion
werequitewellanswered by
Delivery 0.50
mostcandidates.However,a disappointingnumber ofanswersincludedthefixedcostswithin
part(a)andpart(b)whichdefiedthepurpose ofthewholequestionreally.Thathavingbeen Totalvariablecost 8.70
said,mostanswersweregood. Mark-up(30%) 2.61
Transferprice 11.31
Answers265 266 PerformanceManagement(PM)
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(b) PriceNailwouldcharged under total cost plus10% (a) Operatingstatement
$ $
Totalvariablecost frompart (a) 8.70 Budgetedsurplus(W1) 98,750
Extrafixedcost (0.25×$15×0.8) 3.00 Fundingshortfall(W3) (80,000)
Totalcost 1.70 18,750
Markup (10%) 1.17 Favourable Adverse
Transferprice 12.87 $ $
Theincreaseinpriceifthe pricingpolicyswitchesto total cost plus10%is $1.56per unit Freemeals(W4)
($12.87– $11.31). Pricevariance 4,000
Usagevariance 8,750
(c) Fixedcosts can be accounted forina numberof ways.Assuch, includingthe fixedcost
withinthe transferpricecouldlead to manipulationof overheadtreatment. Forexample, Overnightshelter(W5)
employingabsorptioncostingor activity-basedcosting. Pricevariance 4,380
Usagevariance 31,000
Includingthe fixedcosts inthe transferpricewillbenefitthe manufacturer,whocan ensure
that all costs incurredduringthe manufacturingprocessare covered.Assumingthe fixed Advicecentre (W6)
overheadabsorptioncalculationsare accurate, the manufacturingdivisionshouldbe Pricevariance 9,100
guaranteed a profit. Usagevariance 7,500
Themainproblemwiththispricingstrategy isfixedcosts are effectivelytreated as Campaigningand advertising(W7)
variablecosts fromthe perspectiveof the stores,as they are includedwithinthe variable Expenditurevariance 15,000
buy-inprice.Thiscouldlead to poor decision-makingfroma group perspective. Fixedcost (W8)
Expenditurevariance 18,000
(d) Managersof the retailstoresare likelyto be moremotivatedifthey are givenfreedomin
whichto operate and are able to purchase fromoutsidesuppliersifpricesare cheaper. 31,000 66,730 (35,730)
Actualshortfall(W2) (16,980)
Inaddition,the performanceof store managers willbe easier to assess inan environment
inwhichmanagers are able to controlgreater elementsof the business. Workings
Pricedifferencesare perhaps to be expected,giventhat productsare rarelyidentical. A 1 Budgetedfigures
Thereis a riskthat store managers purchase cheaper shears of inferiorqualityto those N
S
W $
G
producedinternally(whilstclaimingthey are comparable)inorderto achievea greater E HG H
margin.Suchscenariosjeopardisethe reputation of the brand forthe benefitof individual R Freemealsprovision 91,250 (18,250mealsat $5 per meal)
stores. Overnightshelter(variable) 250,000 (10,000bed-nightsat $30 – $5 per night)
S
Advicecentre (variable) 45,000 (3,000 sessionsat $20 – $5 per session)
Allowing store managers to purchase fromcheaper supplierscouldresultinHammerlosing
controlof its businessas retailstorescouldpotentiallystockdifferentshears and other Fixedcosts 65,000 (10,000$5)+(3,000 $5)
productsfroma range of differentsuppliers.On the other hand, flexibilityis increasedand Campaigningand advertising 150,000
profitscouldincreaseas store managers findbargain prices. 601,250
Ina competitivemarket,it is unlikelythat supplierswillofferproductssignificantlycheaper Surplusforunexpectedcosts 98,750
to Hammerfora sustainedperiodof time.Anycheap pricesaccessed by store managers Fundraisingtarget 700,000
are likelyto be the resultof a sale or specialpromotion.Ifthisis the case, it wouldnot be
advisableforHammerto grant store managers the powerto purchase fromcheaper 2 Actualfigures
externalsuppliersinthe longterm. $
Overallprofitabilityof the companyis key. Theretailstoresand Nailshouldbe workingina Freemealsprovision 104,000 (20,000 mealsat $5.20 per meal)
way that is best forthe companyoverall.Thisis knownas goal congruence. Overnightshelter 223,380 (8,760bed-nights$25.50per night)
Advicecentre 61,600 (3,500sessionsat $17.60per session)
351 Woodside
Fixedcosts 83,000
Campaigningand advertising 165,000
Workbookreference.Operatingstatements are coveredinChapter 16and not-for-profit 636,980
organisationsinChapter 21. Shortfall 16,980
Toptips. Inpart (a), fixedcosts do not relate to any particularactivityof the charityand so a Fundsraised 620,000
marginalcostingapproach has to be used inanalysingthe budgeted and actual information
3 Fundingshortfall=700,000 – 620,000 =$80,000 (A)
provided.Rememberto apply yourdiscussionto the specificentity. Asthe organisationis a
charity, adversevariancesdo not necessarilyequate to poorperformance. 4 Freemealspricevariance=(5.00 – 5.20)20,000 =$4,000 (A)
Part (b)is a straightforwarddiscussionusingknowledgethat you shouldbe familiarwithforthis Freemealsusage variance=(18,250– 20,000) 5.00 =$8,750(A)
exambut, again, you mustspecificallyreferto the issuesthat Woodsidefaces.
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5 Overnight
shelter
pricevariance
=(25.00– 25.50) 8,760=$4,380(A) Itis unlikelythat Woodsidehas carriedout a detailed analysisof costs and it has probably
used an incrementalapproach to budgeting.Thiswilllimitthe accuracy of its forecasts,
Overnight
shelter
usagevariance
– (10,000– 8,760) 25=$31,000(F) but staff may not have the necessaryfinancialskillsto use moreadvanced techniques.
6 Advice
centre
pricevariance
=(17.60– 15.00) 3,500=$9,100(A) Controllingcosts
Advice
centre
usagevariance
=(3,000– 3,500)15.00=$7,500(A) Thisis a keyarea of financialmanagementdue to the need forefficiencyand economy.
Inputssuch as food,drink,beddingetc can be sourcedas cheaplyas possibleand
7 Campaigning
andadvertising
expenditure
variance
=150,000
– 165,000
= $15,000
(A) expensessuch as electricityand telephoneusage can be kept to an absoluteminimum
8 Fixedcostexpenditure
variance=65,000– 83,000=$18,000(A) throughcarefuluse.
There
wasa fundraisingshortfall
of$80,000compared tothetargetandcostswereover Theresponsibilityforcost controlwouldprobablybe the responsibilityof the full-time
budgetinallareasexcept
overnightshelter
provision. membersof staff, but a cultureof economyand efficiencycan be encouragedamongst
the volunteers.
Provision
offreemealscost14%(104,000– 91,250/91,250)morethanbudgeted withmost
ofthevarianceduetotheextra1,750mealsthatwereprovided.However $4,000ofthe Woodsidewillalso need to provideannual accounts inorderto retaincharitablestatus and
variancewasduetoanincrease of20c(5.20– 5.00)intheaveragecostofa meal. to showthe providersof fundsthat theirdonationsare beingused as they intended.
Overnightshelter
cost$26,620(250,000– 223,380)lessthanexpected.$31,000was 352 Ties Only Co
savedbecause therewere1,240bednightslessoftheservice
usedthanexpected, butthe
averageunitcostoftheprovision
increasedby50c,leadingtoanadverse pricevariance
of
$4,380. Workbookreference.Performanceanalysisis coveredinChapter 19.
Advicecentrecostswerealsoabovebudget by37%(61,600– 45,000/45,000). Therewere Toptips. Inparts (a) and (c)you need to analyse and commenton each part of the givenresults.
twofactorscontributing
tothisincrease.
Usageoftheserviceincreased
by17%(3,500– Makesure yourpercentages calculationtechniquecan cope withthis!
3,000/3,000)andaverage costsalsoincreased
by17%(17.60– 15/15).
Part (b)simplyrequiresa summaryof the informationinpart (a) witha commentabout future
Fixedcostsofadministration
andcentremaintenancewere$18,000(28%)abovebudget performanceversuscurrentperformance.
andcampaigning andadvertisingwere$15,000(10%)abovebudget. Easymarks.Usingyourcommonsense willgain you easy marksthroughoutthisquestion.Use
Theshortfall identifiedintheoperating statementmayinitiallycauseconcern and headingsto makeyouranswereasy forthe markerto identifywhereto award marks.
individual adverse variances couldbeinvestigated todetermine iffuturecostincreases Examiningteam's comments.Calculatinga ratiowithoutreal commentdid not gain fullmarks.
couldbecontrolled. However, theobjective ofa charitysuchasWoodside isnottomake A
N
S
W Anopinionsuch as 'impressivegrowth'was required.Candidates shouldofferan opinionas to
G money buttoprovide helptohomeless people. E HG
whythe ratio has occurred. H
Thefigures demonstrate thatthisobjective wasachieved interms ofadviceandfreemeals R

provided. Itappears thatthedemand forovernight shelterhasfallen,soresourcescouldbe S
switched fromthisareaifitisbelieved thatthisisa long-termtrend.Furtherinvestigation Markingscheme
ofthereason forthefallindemand would beuseful.
Marks
(b) Financial management andcontrol ina not-for-profitorganisation(NFPO)suchasthe
Woodside charityneedstorecognise thatsuchorganisations oftenhavemultiple (a) Sales 2
objectives thatcanbedifficult todefineandareusually non-financial. Grossprofit 2
Performance ofsuchorganisations isjudged interms ofinputsandoutputs andhencethe Websitedevelopment 2
valueformoney criteriaofeconomy, efficiency andeffectiveness. Administration 2
Economy means thatinputs should beobtained atthelowest cost.Efficiencyinvolves Distribution 1
gettingasmuchaspossible forwhatgoesin:ieusingthecharity's resourcesasefficiently Launchmarketing 2
aspossible toprovide theservices offered bythecharity.Effectivenessmeans ensuring
the Overallcomment 2
outputs, ietheservices provided,havethedesired impacts andachieve thecharity's Max 10
objectives. (b) Futureprofitscomment 3
Performance measures todetermine whether objectives
havebeenachieved canbe (c) Numberof tie sales 1
difficult
toformulate foranorganisation suchasWoodside. Tiepricecalculation 2
Measures suchasthenumber offreemeals served,number ofadvicesessions givenand On-timedelivery 2
number ofbed-nights used,showthatquantitative measures canbeusedtodemonstrate Returns 2
thatthecharityismeeting a growing need. Systemdowntime 1
Financial management andcontrol inthisorganisation willprimarilybeconcerned with Summarycomment 1
preparing budgets andcontrolling costs. Max 7
Preparing budgets 20
Budgets relyonforecasting andaccurate forecastscanbedifficult
toprepare fora charity
suchasWoodside. Thelevelofactivity isdriven bytheneeds ofthehomeless andtherefore
difficult
topredict. Ahighdegree offlexibilityisrequiredtomeetchanging demand, so
provision needs tobebuiltintobudgets forthis.
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(a) Financialperformance These figuresillustratethata short-term viewofa newbusiness isnotnecessarily a good
Salesgrowth indicatoroffuture performance.
(c) Non-financial performance indicators
TiesOnlyCo appears to have made an excellentstart withinitialsales of $420,000
growingby 62%((680,000– 420,000)/420,000 ×100%)to Quarter2. Thisis particularly Average priceofties
impressivegiventhe acknowledgedcompetitivenessof thisbusinesssector. Quarter 1:$420,000/27,631 =$15.20
Gross profit Quarter 2:$680,000/38,857 =$17.50
ThegrossprofitmargininQuarter1was 52%(218,400/420,000×100%)and 50% Inpart(a)itwassuggested thatthefallingrossprofitmargin mightbeduetoa price
reduction.Thisdataprovides evidence thatthisisnotthecase.There musttherefore bean
(339,320/680,000×100%)inQuarter2. Thelevelof marginmay be as expectedforthis
businesssectorbut wewouldneed industryaverage data forcomparison. alternativeexplanation.
On-time delivery
However,a fallin marginneeds to be investigated.Itcouldbe that TiesOnlywas initially
able to sourcecheaper tiesbut the rapid growthmeant that alternative,moreexpensive, Thishasdropped significantly
from95%to89%andthisisworrying. Theservice provided
suppliershad to be found.Alternatively,competitorsquicklyrespondedto thisnewentrant tocustomers isa keydifferentiator, especially
ifthecompany iscompeting onquality,
not
and loweredtheirpricesinresponse.Thispressurecouldhave forcedTiesOnlyto lower price.Customers willgoelsewhere iftheirexpectationsarenotmet.Action willneedtobe
theirprices. takentoremedy thisproblem.
Websitedevelopment Salesreturns
Thisisagaina keyindicator ofquality andwhether customers'expectations arebeingmet.
Allwebsitedevelopmentcosts are beingwrittenoff as incurredso wewouldexpectcosts to Returns haverisenfrom12%to18%andarenowabovetheindustry average of13%.Returns
be higherinthe initialquarters. Thewebsitecosts are overa thirdof total expenses,so the aretobeexpected oninternetsaleswhere theproduct maylookdifferent inreality,
buta
initiallossis mostlyexplainedby thiswrite-offand does not thereforegiveany majorcause higher thanaverage ratemeans thattheinternetisnotadequately describing and
forconcern. illustrating
theproducts. Again,quality maybelessthancustomers expect.
Administrationcosts Alternatively,
thepressure todispatch ordersmayberesulting inerrors orpackaging
Althoughadministrationcosts have riseninabsoluteterms,as a percentage of sales they problems. Eitherofthesereasons doesnotbodewellforthebusiness andactionmustbe
have fallenfrom23.9%(100,500/420,000×100%)to 22.2%(150,640/680,000×100%). takentoremedy theproblem.
Administrationcosts are the secondbiggestexpenseso veryimportantto control. System downtime
A
Thiscouldindicatethat administrationcosts are beingeffectivelycontrolledwhichis good N
S Customers whouseshopping websites areusually time-pressured individuals
whowillnot
news.Itcouldalso be because fixedoverheadsare beingspread overa larger volumeand W reactwelltodelaysinloading pages.Itisalltooeasytoimmediately switchtoa
G
E HG H
thiswillcontinueto improveas the businessgrows. R competitor'swebsite soitisessentialthatsystem downtime iskepttoanabsolute minimum

toavoidlostsales.
Distributioncosts S
Itwould beuseful tocompare thefigures withanindustry average buttheimportant point
Thesecosts formthe smallestproportionof total expenses(about 6%)and the proportion isthatsystem downtime hasdoubled. Thiscouldbeduetopressure onthewebsite asa
of distributioncosts to sales has remainedconstant at 4.9%(20,763/420,000×100%). resultofthevolume ofdemand. Asthewebsite development hasbeensucha costlyand
Thesecosts willbe subjectto externalinfluences,such as a generalriseinpostage costs. important partofthebusiness set-up,theowners ofTiesOnlyshould haveanurgent
Launchmarketing discussionwiththewebsite developers tocomeupwitha solution.
Thisissimilarto the websitecosts as it isexpectedto fallonce the businessis established. Conclusion
TiesOnlywillneed to continueto market its websitebut thisis likelyto be cheaper than the TiesOnlyisdoingwellinterms ofsalesgrowth andpotential profitability
fora brandnew
initialbig launchmarketingcampaign.Thenegativeimpacton profitabilitywilltherefore business.However theowners needtofocustheirattention ontheaccuracy oforder
reduceovertime. delivery,website reliability
andthequality oftheproduct. Furtherinvestigationneedstobe
madeofthefallingrossprofitmargin.
Other variableexpenses
Thesehave again increasedinlinewiththe sales volumeand are 11.9%of sales 353 Best Night Co
(50,000/420,000 ×100%).
(b) Currentand future profits Workbook reference.
Performancemeasurement iscovered inChapter 19.
Aninitiallookat the accounts wouldidentifya worryingtotal lossof $188,303inthe first Toptips.Atfirstglance,youmaynotknow where tobeginwiththisquestion! Lookcarefully
atthe
twoquarters. scenario
anddecide onsome headingsforyouranswer – forexample, revenue,discounts,
However,muchof thislossis due to the websitedevelopmentcosts whichwillnot be operatingprofit.
You'll
needtoperformsome calculations
(worth fivemarks)
andthenyou'llhave
incurredagain. Websitesdo need to be maintainedand continuallyimproved,but thiscost somethingtotalkabout.
willbe muchlower.Launchmarketingis another initialcost whichwillfallrapidly.Ifwe Besuretoexplain whatyourcalculations
meanforBestNightCospecifically, toadddepthto
deduct these expenses,the businessmade an underlyingprofitof $47,137inQuarter1and youranswer. Donotforgettocomment onnon-financial performance indicators.
$75,360inQuarter2, an encouragingupwardtrend. Easymarks. There areeasymarks available
throughout thisquestion.
Theinitialimpactof the businesshas been verygood.Thereis a threat fromfallingmargins
to considerbut cost controllookseffectiveso the futureis promising.
Answers 271 272 Performance

Management
(PM)
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Examiningteam's comments.Thistype of questionhas been tested many timesbeforeinthe Additional
revenue – Oneofthepotential benefits
ofincreased occupancy rates,evenifguests
PerformanceManagement(PM)examinationand shares many similaritieswithrecent questions arepayinglessperroompernight,isthattheywillgenerate additional
revenue fromfoodand
publishedon ACCA'swebsite''''.Thisparticularquestioncomprisedof one 20-markrequirement drinksales.Thisappears tobethecasebecause additionalrevenues haveincreased by
whichcan appear dauntingat firstbut thiscan be overcomeby applyinggood examtechnique. approximately 5%.
Akeyskillis the abilityto break the requirementdownintomanageable parts and tackleeach in Totalrevenue – Intotal,revenue(netofdiscounts) hasincreased2·4%in20X7v20X6.Giventhe
turn. Thefirstpointto note about thisrequirementis that there is already someguidanceabout toughcompetitive environment,BestNightCocouldviewanyincrease inrevenues aspositive.
howthe 20 marksare brokendown– fivemarksforcalculationsand 15marksfordiscussion.In Moreover,provided therevenue achieved fromselling theroomisgreater thanthevariable costof
thistype of performancemeasurementquestion,each correctcalculationis worth0·5marksso providing
it,thenincreasing occupancy levels
should increasethehotels'contributiontoprofit.
candidates shouldaimto be performingten relevantand correctcalculationsto scoreallof the
fivemarks.Therewereinexcessof 30 relevantcalculationswhichcouldhave been performed Operatingprofit– However, despitetheincreaseinrevenue, operating
profits havefallenby
fromthe data providedinthe scenario,so these fivecalculationmarksshouldhave been $0·3m(1·3%) between 20X7and20X6,duetoa sizeable increase
inoperating costs.
relativelysimpleto score.Unfortunately,somecandidates did not performas wellas they could ThereisnodetailaboutBestNightCo'soperating costs,forexample,thesplitbetween fixedand
have on thisquestionbecause they did not performenoughcalculations. variable
costs.However, inanincreasingly competitivemarket,costcontrolislikelytobevery
important.
Assuch,the$3million (3·3%)increaseinoperating costsbetween 20X6and20X7is
potentially
a causeforconcern, andthereasons fortheincrease should beinvestigated further.
Markingscheme
However,
whenlooking toreducecosts,itwillbeveryimportanttodosoina waywhichdoesnot
Marks compromise
customersatisfaction.
Moregenerally, BestNightConeedstoavoidcutting
expenditure
inareaswhichwillhavea detrimentalimpactoncustomersatisfaction
ratings,
for
Calculations 5 example,
notreplacingmattresses
eventhough theyarebecominguncomfortabletosleepon.
Revenue 4
Operating profitmargin – Theincreaseincostshasalsoledtoa fallinoperating
profitmargin
Operatingprofit 2 from20·8%to20·0%.
ROCE 2
Customersatisfaction 3 Itisperhaps moreinstructivetolookatthemargin basedonstandard roomratespernight,
thereby reflecting
theimpact ofthediscountsofferedaswellastheincreaseincosts.Onthis
Othervalidpoints 4 basis,themargin fallsslightly
more:from18·9% to17·6%.
20
20X7 20X6
A
N
S $'000 $'000
W Totalrevenue 119,377 116,621
G
Gross roomrevenue– BestNight's'gross' roomrevenuebased on standard roomrates has E

R
HG H
increasedby 6·6%in20X7,whichreflectsthe higheroccupancyrates (74%v 72%)and the Discounts offered 16,783 11,430
increaseinstandard roomrates ($140v $135per night)'. S Grossrevenue 136,160 128,051
Operating profit 23,915 4,242
However,thisgivesa rather misleadingimpressionof howwellthe hotelshave performedinthe
year to 20X7. Operating profitmargin 17·6% 18·9%
Revenueafter discounts– Revenuefromroomsales, adjustedfordiscountsor rate reductions ROCE– Thisreduced profitability
isalsoreflectedinthecompany's returnoncapitalemployed
offered,has actuallyonlyincreased1·8%,and that reflectsthe significant45%increasein whichhasfallenslightly from62%($24·2m/$39·1m) to60·5%($23·9m/$39·5m). Thissuggests
discountsor reductionsoffered: thatthevaluewhichBestNightCoisgenerating fromitsassetsisfalling.
Thedecline inROCE
couldbea particular concern giventherelative lackofcapitalinvestment inthehotels recently.
20X7 20X6 %change Capitalinvestment willincreasethecostofBestNightCo'snon-current assets,thereby reducing
$'000 $'000 $'000 ROCEforanygivenlevelofprofit.
Standard revenue 111,890 104,976 6·6%
Discounts/reductions 16,783 11,540 45·4% Customer satisfactionscores
Roomrevenuenet of discounts 95,107 93,436 1·8% Although thereduction inprofitability
should bea concern forBestNightCo,thereduction in
customer satisfactionscoresshould potentially
beseenasa greater causeforconcern. The
Faced withthe decliningnumberof businesscustomers,and consequentlythe prospectof lower
occupancyrates, managers may have decidedto offerlowerroomrates to try to retainas many scoressuggest that,inthespaceofoneyear,BestNightCohotels havegonefrombeinginthe
of theirexistingbusinesscustomersas possible,or to try to attract additionalleisurecustomers. top10%ofhotels toonlyjustbeinginthetop25%.Thisisa significant declineinoneyear,and
onewhichBestNightCocannot affordtocontinue.
Althoughoccupancyrates increasedby 2·8%(from72%to 74%whichnowexceedsthe budgeted BestNightCoprides itselfonthecomfort ofitsrooms andthelevelofservice itoffersitsguests.
level),revenue,net of discounts,onlyincreasedby 1·8%.Thismeans that revenueper roomper
Bothofthesefactors arelikelytobeimportant considerationsforpeople whenconsidering
nightafter discountsin20X7was lowerthan in20X6,despitethe standard rate beinghigher whether ornottostayina BestNightCohotel.Therefore, fallingcustomer satisfactionslevels
($140v $135).
couldbeseenasanindication thatfewer existingcustomers willstayata BestNightCohotelin
Inthe contextof tough marketconditions,the decisionto increasethe standard roomrate for future
– thereby threatening occupancy rates,andprices,infuture.
20X7appears rather optimistic.Althoughthe hotelmanagers have managed to achieve
occupancyrates higherthan budget, they have onlymanaged to do so by reducingroomrates. Moreover, thescores suggestthatthedecision todefertherefurbishment programme islikelyto
havea detrimental impact onfuture performance.

Management
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354 Jump Totalnumberof bonushitsfromtable above=6
Thebonusearned by the manager is 6 $400 =$2,400. Thisrepresents50%of the total
bonusavailable.
Workbook reference.
Performance measurement iscoveredinChapter19. (b) Itisessentialthat the targets set are based on elementsof the jobthat the localmanagers
Toptips.Ensure
thatyouranswer topart(b)supports botharguments.Useheadings inyour are able to control.Targetsthat are based on elementsthat localmanagers are unableto
answer,oneforeachtarget. influencewillbe seen as pointlessand unrealisticand coulddemotivatestaff at the local
manager level.
Easymarks.Part(c)isrelatively
straightforward
andisworth fivemarks.
Staff on time
Examiningteam'scomments. Answers topart(a)weregoodonthewhole. Fora narrative Individualmembersof staff may be late forworkas a resultof externalfactors, including
requirement,
part(b)wasfairlywellansweredoverall.
Part(c)askedfora description
ofwaysin homepressuresor delayedpublictransport.Suchfactors cannot be controlledby the local
whichthemanager couldmanipulatethesituation
inordertomakesuretheygettheirbonus.
manager. Howeverifsuch problemsoccuron a regularbasis to certainmembersof staff,
Again,thereweresomegoodanswershere,withonlya minority
ofcandidates
talking
about the localmanager does have the powerto amend their contract of employment.
manipulatingprofits,
whichwasn't
relevant
toa businesswhereprofit-based
targets
weren't Theway inwhichthe localmanager manages staff willimpactuponhowmotivatedthey
beingused. are to workand to arriveon time.Thelocalmanager has the powerto deviseshiftpatterns
that best suittheirteam and can reward themaccordingly,throughtheirabilityto amend
employmentcontracts.
Marking
scheme
Insummary,lateness to workcan be controlledby the localmanager.
Marks Personaltrainingsessions
(a) Pertarget 2 Thelocalmanager has controloverpricescharged to customers.Ifdemand forpersonal
6 trainingsessionsfallsthey can reducepricesor makespecialoffersina bid to increase
(b) Foreachtarget– supporting
controllability 1.5 customernumbers.
Foreachtarget– denying
controllability 1.5 Anumberof potentialcustomersmay viewpersonaltrainingsessionsas a luxury,
9 particularlyinthe currenteconomicclimate.Also,the personaltrainingmarketis
(c) Foreachideaofmanipulation 2.5 particularlycompetitive,whichmay makeit difficultforthe localmanagers to increase
sales.Localmanagers can take steps to improvethe serviceofferedby the sportsclubbut
5 A any significantexpenditurerequiresapprovalat Boardlevel.
20 N
S
W Insummary,the localmanager can onlypartly control the numberof personaltraining
G
E
R
HG H
sessions that are booked.

S Memberuse of facilities
(a) Bonus
calculation
Thelocalmanager controlsthe staff and hence the levelof customerservice.Itis likelythat
Qtrto Qtrto Qtrto Qtrto Bonus a highlevelof customerservicecouldencouragesomemembersto use the facilitiesmore
30June 30September 31December 31March hits often. Thelocalmanager also has the abilityto influencemembernumbersby adjusting
20X9 20X9 20X9 20Y0 membershipprices.
Staffontime?
On-time% 95.5% 94.2% 94.0% 95.8% However,externalfactors such as workpressuresand levelof health may preventsome
(430/450) (452/480) (442/470) (460/480) membersfromvisitingthe clubas oftenas they wouldlike.
Bonus Yes No No Yes 2 Insummary,the localmanager can onlypartly controlthe numberof membervisits.
earned? (c) Reduceprices
Qtrto Qtrto Qtrto Qtrto Bonus Thetargets are largelyvolume-drivenand localmanagers have the powerto adjust
30June20X9 30September 31December 31March hits membershipfees and pricesfor personaltrainingsessions.Localmanagers could
20X9 20X9 20Y0 thereforereducepricesto ensurethat they meet the targets and thereforeobtaintheir
Membervisits bonus.Sucha scenariowouldharm Jump's overallprofitability.
Target
visits 21,600 23,040 23,760 24,480
(60%3,000 (60%3,20012) (60%3,30012) (60%3,400 Recordingof transactions
12) 12) Alocalmanager withaccess to the accountingrecordscoulddeliberatelyrecordvisitsto
Actual
visits 20,000 24,000 26,000 24,000 the clubinthe incorrectperiodinorderto ensurethat they achievea bonus.Forexample,
Bonus
earned? No Yes Yes No 2 inQ2 the target forpersonaltrainingsessionswas not met by fivesessions.Themanager
Qtrto Qtrto Qtrto Qtrto Bonus couldrecordthe firstfivetransactionsof Q3 inQ2 to ensurethat they obtainan extra
30June 30September 31December 31March hits $400 bonus.
20X9 20X9 20X9 20Y0
Personal
training
Target
visits 300 320 330 340
(10%
3,000) (10%
3,200) (10%
3,300) (10%
3,400)
Actual
visits 310 325 310 339
Bonus
earned? Yes Yes No No 2
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355 Bridgewater Co Trainercosts shouldnot exceed$180per teaching day
Themanager ispaying$200 (8,000/40) per teachingday intrainercosts, whichexceeds
the target. Theybelieveinqualityand thereforeappear to be payingmoreto attract better
Workbookreference.Performancemeasurementis coveredinChapter 19. teachingstaff. Thismay wellimprovesales inthe longtermas the reputationforquality
Toptips. Thekeyto successinthistype of questionis readingthe informationinthe questionvery deliverybecomesknown,but it is at the expenseof increasedcosts inthe shortterm.
carefullyand makingfulluse of it. Whenthe ACCAexaminingteam asks for'comment',an Roomhirecosts shouldnot exceed$90 per teaching day
opinionis required,not simplya
re-statementof the proposals. Themanager of thisdivisionis also spendingmoreon roomhirecosts than the target. They
are spending$100per teachingday rather than $90. Thiscouldbe again part of their
Easymarks.Forhalfmarksinpart (a) allthat was expectedwas a statement (withsimple qualityimprovementpolicyas they are hiringbetter facilities,but it couldalso be due to
supportingcalculations)of whetheror not the manager wouldmeet each of the targets. poornegotiationand buyingstrategy.
Examiningteam's comments.Candidates mustbe able to assess performance,whichmeans
interpretfinancialand otherdata and makesensiblecommentson it. Fewcandidates realised Eachdivisionshouldmeet its budget for profitper quarter and annually
that the division'simprovingperformanceinQuarters3 and 4 came too late forthe promotionat Theachievementof thistarget suffersfromthe same problemas the sales target. The
the end of Quarter2. Manyonlycommentedon the profitsof the divisionand ignoredallthe manager willmeet the target forthe year by $2,500, but isbelowtarget inthe firsttwo
other targets. Manyalso assessed the performancemoregenerally,calculatingamongother quarters.
things%marginsand ignoredthe targets altogether.Thiswas verydisappointing. Thisagain willimpacton theirpromotionprospectswhich,overall,are not lookinggood.
Part (b)was also poorlyperformedand misreadingthe questionwas common.Candidates must Theyare failingto meet any of the targets inthe firsttwoquarters and willhave to hope
learnto read performancemanagementquestionsmorecarefully. that the seniormanagers agree withtheirlong-termrather than short-termapproach.
ForPart (c)candidates answersprimarilyconsistedof a re-statementof the differentsteps being (b) Revisedforecasts
proposedwithlittleor no commentat all.Acommentrequiresopinionand anythingsensible Q1 Q2 Q3 Q4 Total
scoredmarks. $'000 $'000 $'000 $'000 $'000
Candidates shouldprepare themselvesto assess the performanceof a business,both financially Existingsales 40.0 36.0 50.0 60.0 186.0
and non-financially,ifthey want to pass. Vouchersales ($12580/4) 2.5 2.5 2.5 2.5 10.0
Softwaretraining 10.0 12.0 22.0
Markingscheme 42.5 38.5 62.5 74.5 218.0
A Less:
N
S
Marks W Existingtrainercosts 8.0 7.2 10.0 12.0 37.2
G
E
R
HG H
(a) Pertarget discussed 2 Additionaltrainingcosts ($200teaching

days) 2.0 2.4 4.4
8 S
(b) Revisedforecasts Roomhire 4.0 3.6 5.0 6.0 18.6
Vouchersales effect 1 Additionalroomhire($100teachingdays) 1.0 1.2 2.2
Vistasales effect 2 Staff training 1.0 1.0 1.0 1.0 4.0
Extratrainercost 1 Additionalstaff training 0.5 0.5 1
Extraroomhirecost 1 Othercosts 3.0 1.7 6.0 7.0 17.7
Staff trainingincrease 0.5 Software 1.8 1.8
Softwarecost 0.5 Forecastnet profit 24.2 24.5 37.5 44.9 131.1
Overallrevisedprofitcalculation 1 Originalbudget profit 25.0 26.0 27.0 28.0 106.0
Max 6
(c) Voucherscheme
(c) Peridea commentedon 2 Thevoucherschemelookslikea good idea as the manager is confidentthat the take-up
Max 6 wouldbe good and customerswouldfollowtheiradviceto attend one sessionper quarter.
20 Thiswillincrease revenuewithoutincurringadditionalcosts, as customerswouldattend
existingplannedcourses.However,someadditionalunforeseencosts may stillbe incurred.
Theadditionalrevenueand profitwillhelp,but targets forQuarters1and 2 willstillnot be
(a) Eachquarter, sales shouldgrowand annual sales shouldexceedbudget met so the voucherschemewillnot necessarilyimprovethe manager's promotion
prospects.
Inthe Northwestdivision,sales are forecastedto fallby 10%(4/40 100%)fromQuarter1
to Quarter2 but then start to grow.Averagegrowthper quarter overthe year is 14.5% Thereis alwaysthe danger withofferinga discountthat existingcustomerswillbe
disgruntled,particularlyifthey have already paid a higherpricefora coursethat is now
(3(60/40) – 1). Annualsales are forecastto exceedthe sales budget by $6,000 (186– beingofferedat a discount.Thevouchersare, however,onlybeingofferedto new
180). customersso the manager shouldbe able to offerthispromotionwithoutupsettingexisting
Itwouldthereforeappear that the annual target willbe met. However,the promotion customers.
decisionis to be taken inQuarter3 and the slowstart to the year may not reflectwellon
the manager of the Northwestdivision.
Page 298 of 479 Page 299 of 479

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Softwareupgrade (a) Competitiveness
Itis essentialthat a softwaretrainingcompanyuses the latest softwaretechnologyon its MSC OSCAverage
courses.Theinvestmentinsoftwareand staff trainingis thereforea necessityand cannot Percentageof websitehitsconvertedintoorders
be avoided. (9,506/14,000)x 100 67·9%
(11,870/18,260)x 100 65%
Thecourseswillgenerate extra revenuebut not untilQuarters3 and 4. Thissoftware
Thisratio indicateswhetherMSC'sservicesare attractivecomparedto its competitors,
upgrade willthereforefurtherdamage the achievementof targets inQuarters1and 2, as whichis importantifit is goingto surviveinsuch a competitivemarket.
costs willrisebut the extra revenuewillbe too late forthe promotionassessment.
Itis to be hoped that the seniormanagers willrecognisethe essentiallong-termplanning Ithas performedsubstantiallybetter than otherOSCservicecentreson average, having
beingundertaken. converted67·9%of websitehitsintojobs,comparedto the 65%convertedby otherservice
centres.Thisis a good result.
Delayingpayments to trainers Financialperformance
Thisis not a good idea. Noneof the performancetargets willbe affected, as the plan will
not affect costs or profits.Theonlypositiveimpactwillbe on cash flow.Theworrying MSC OSCAverage
aspect is the negativeimpactit may have on relationshipswithtrainers. Softwaretraining Grossprofitmargin
is a competitivemarketand good trainerswillbe indemand by a numberof training ($304,200/$760,500)100 40%
providers.Ifthe companyis to offerqualitytraining,it musthave the best trainersand this ($328,146/$890,365)100 36·9%
is not the way to retainthem. Grossprofitmarginis the preferredmeasureforfinancialperformancefromthe data
Inconclusion,ifallthe proposalsweretaken together, they willnot improvethe manager's presented.Itshowsthe percentage of revenuewhichexceedsthe cost of goodssold.
chance of promotionas any benefitswillaccrue after Quarter2. MSC'sgrossprofitmarginis almostthree percentage pointshigherthan the average,
whichis a good result.Thiscouldbe partly because they did relativelywellon theirnew
356 One Stop Car Co servicepack sales (note4) but it is also likelyto be because theirratio of seniormechanics
to juniormechanicsis lowerthan the average, and juniormechanicswillinvariablybe paid
lessthan seniorones.
Workbookreference.Performancemeasurementis coveredinChapter 19.
Qualityof service
Toptips. Youneed to have a good understandingof Fitzgeraldand Moon'sbuildingblockmodel MSC OSCAverage
forthisquestionas wellas good examtechnique.Youneed to break the requirementdownand A Percentageof jobsfromrepeat customers
N
S
makesure that you answereach elementof it. Foreach dimensionyou need a performance W (1,500/9,506)100 15.78%
G
indicatorcalculation,justificationof the performanceindicatorand discussionabout MSC's E
R
HG H
performancecomparedwithotherOSCcentres. (1,660/11,870)
100 13.98%
Easymarks.Part (b)was straightforwardforthe well-preparedstudent. S Qualityis a keyelementof MSC'sserviceto customersand ifit is poor, customerswillnot
return.
Examiningteam's comments.Studentsdid not scorehighlyinthisquestionbecause many did
not address the fullrequirement.Forexample,many did not justifythe choiceof performance Again,MSChas outperformedthe otherservicecentreson average by 1·8percentage
indicator.Somestudents used tables, whichworkedreallywell.Usingheadingswouldalso work points.Thiscouldbe because it has a higherratio of seniormechanicsto juniormechanics
and mostdid use the dimensionsas headings,but followedthat up witha jumbleof wordsand than otherservicecentres,so the qualityof workis probablybetter, hence the higherlevel
calculations,withoutmakingit clear whichpart of the requirementthey wereaddressing. of repeat customers.
Flexibility
Markingscheme MSC OSCAverage
Timetaken per job
Marks (23,100/9,506) 2·43hours
(24,800/11,870) 2·09hours
(a) Calculations 6
Justificationof PI 3 Thetimetaken to completeeach jobis importantas many customerswilluse MSCbecause
Discussionof performanceunderthe dimensions 7 they can sit and waitforthe workto be done, rather than havingto hirea rentalcar forthe
16 day, forexample.
(b) Explanation 4 Thecomparisonshowsthat MSCtakes longerto completea jobthan the OSCaverage.
4 Thisis not reallya good thingand is probablybecause they have slightlylessexperienced
20 staff on the whole,but it couldalso be that they do a morethoroughjobthan otherservice
centres.Giventhe fact that they have a higherlevelof returncustomersthan the average
and they are graded 9 or 10by theircustomers(10percentage pointshigherthan the
average),thisis presumablynot viewednegativelyby customers.
Page 300 of 479 Page 301 of 479

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Resource
utilisation Totalsalesrevenue
MSC OSCAverage WebCo'stotalsalesrevenue hasincreased 25%(W1)onQuarter 1(Q1),from$2.2mto$2.75m.
Salespermechanic Thisisimpressivegiventhedecision togivea $10discounttoallcustomers whospendover$100.
$760,500/12 $63,375 Itisnotpossibletoattributetheincreasetoanyparticularchangeorincentive withoutanalysing
$890,365/13 $68,490 theperformance indicatorsbelow.
Thekeyresourceina service
company
isitsstaffandsotheseindicators
measure
howthis Netprofitmargin
resource
isbeingutilised.
Thenetprofitmargin hasdecreased from25%to16.7%. Netprofitwas$550,000inQ1and
MSC'sutilisation
ofitsstaffislowerthanthatoftheotherservicecentres
by$5,115 per $459,250 inQ2(W2).Iftheprofitmargin remainedat25%,netprofitforQ2would havebeen
mechanic.Thisclearlytiesinwiththefactthattheaverage timetocompletea jobislonger $687,500. NetprofitforQ2istherefore $228,250lowerthanitwould havebeen.
atMSCthanotherservice centres.
However,giventhattheyusea slightly
lessexperienced
staffonaveragethanothercentres andthefactthattheirgrossmarginishigherthan Thissignificant
decrease islargelyduetothefeeof$200,000paidforanadvert onthewebpage
average,thisshouldnotbeviewed toonegatively. ofa wellknown fashionmagazine. Afurther$20,000isattributable
tothefeepaidtothe
websiteconsultant.
Innovation
MSC OSCAverage Theremaining $8,250couldbethecostsofproviding thefree'FastTrack'delivery
service.
Percentagerevenue
generated
fromnewservice
packs Alternatively
itcouldbethecostofoffering a $10discount
toallcustomers whospentmorethan
[($66,000+$58,000+$54,000)/$760,500] 23·4% $100.Moreinformation would berequired onhowthediscounts areaccounted for(whether
theyareincluded incostofsalesornetted offagainstsalesrevenue).
Furtherdetailofthecosts
MSCwantstooffera widevariety
ofservice
packstoitscustomers
andneedstobe ofprovidingthe'FastTrack'service would alsobeuseful.
innovative
inpackaging
servicesup.
Number oforders fromcustomers/customers spending over$100
The23·4%indicates thatMSCisindeed innovativeintheirapproach totheircustomers'
needs,offeringaninnovativemixofservices.MSChasreallyoutperformed otherservice Thenumber oforders receivedfromcustomers hasincreased by22%,from40,636inQ1to
centres
onthisfront,generatinga farlargerpartofitsrevenue bytheintroduction ofnew 49,600inQ2(W3).This22%increase isinlinewiththe25%increase insalesrevenue.
service
packs,whichmusthaveattracted customers. Thisisa reallystrong
performance. Thenumber ofcustomers spending morethan$100pervisithasincreased by37%,from4,650in
(b) Thestandards blocksetsthetargetfortheperformance indicatorschosen foreachofthe Q1to6,390inQ2.Thisincrease islikelytoexplain the3%increase insalesrevenue thatisnotdue
dimensions.Thetargetsmustmeetthreecriteria – theymustbeachievable, fairand toincreased ordernumbers, depending onhowthediscounts areaccounted for.
encourage employees totakeownership.Ifthetargets setdonotmeetthesecriteria, then A Number ofvisitstowebsite
theperformance oftheorganisationcouldsuffer.''. N
S
W
G
E HG
Thenumber ofvisitstothewebsite hasalsoincreased significantly,from101,589 to141,714(39.5% H
Therewardsblockensures thatemployees aremotivated toachieve thestandards. Italso R (W4)).Ofthisincrease, 28,201(W5)canbeattributed tovisitorscoming through thefashion
considers
thepropertiesofgoodreward schemes whicharethattheyshould beclear,motivating magazine's website. Theremainder oftheincrease islikelytobeduetotheworkofthewebsite
andbasedoncontrollable factors. S consultant.
Ifstandards
andrewards aresetappropriately,thestaffwillbeengaged andmotivated anditis Itisclearthatbothchanges havebeeneffective inincreasing thenumber ofvisitorstoWebCo's
thenmorelikelythatthegoals,iedimensions,oftheorganisation willbeachieved. online store.Ata costof$20,000,theworkofthewebconsultant representsexcellentvaluefor
money. However WebCo'ssalesarenotreallyhighenough tojustify anoutlayof$200,000for
357 Web Co thewebmagazine advert, hencethesignificant fallinnetprofitmargin (detailedabove).
Conversion rate– visitortopurchaser
Workbook reference.
Performancemeasurement iscoveredinChapter19. Theconversion ratehasdecreased byfivepercentage points, from40%to35%.Thisistobe
Toptips.Thisquestion
maylookdauntingatfirstglance,giventhe20marks available
fora single expected, giventhesubstantial increase invisitors
tothewebsite asa resultofthewebmagazine
requirement.
Usetheinformation
inthescenarioasa framework whenstructuringyouranswer advertandsearchengine optimisation.
andaddress eachperformanceindicator
under a separateheading.Don'tforgettohighlight
any Readers ofthefashion magazine mayhaveclicked ontheadvert linkoutofcuriosity andmay
instances
where further
information
isrequired. return tothesiteandpurchase products ata laterdate.
Further information isrequiredtoconfirm theabove.Forexample, thetotalnumber of'visitors
to
Marking
scheme purchasers' splitinto(i)visitors
whovisited thesitethrough thelinkontheonline magazine, and
(ii)visitors
whodidnot.
Marks Website availability
Calculations 4 Website
availability
hasremainedat95%.Thisindicates
thatthechangesmadebytheIT
Missing
info 3 departmenthavenotcorrected
theproblem(s).
Discussion
andfurther
analysis
(2–3marks
perpoint) 18
Lackofavailability
mayhavelostWebCoa significantnumberofsales.Further
information
is
Conclusion 2 required
toquantifytheimpact.
Forexample,thenumber ofaborted
purchasesduetothe
Max 20 website
becoming unavailable.
Answers281 282 Performance

Management
(PM)
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Subscribersto onlinenewsletter
(4) InSista,firesafetyregulations
wereintroduced;thiscouldhaveanimpact onthe
Thenumberof subscribershas increasedby 159%,from4,600 to 11,900(W6).Thishuge increase requirement forlabour.
is mostlikelydue to the free 'Fast Track'deliveryserviceofferedto allsubscribers.
(5) Inaddition, thepropertytaxhasaffected rental
costs,sotheseshould belookedattoo.
Asthe fallinnet profithas already been accounted forabove,it appears that Web Co has
managed to offerthisservicewithoutincurringany extra cost. Andwhere possible,compare therelative
performanceofthetwodivisions.
Furtherinformationis requiredto establishwhetherthe company'sviewof subscribersis correct Thereisa lotyoucouldwriteabout– butremember tokeepyourtimedisciplineanddonot
(that subscribersbecomecustomerswhoplace furtherorders).Forexample,has the numberof exceed yourallocated timeforthequestion.
repeat customersincreased? Easymarks. Thequestion enablesyoutomakeasmanyratiocalculations asyoucan,andyou
Conclusion shouldbeabletocalculate somequiteeasily– suchastheincrease insalesrevenueandprofitin
eachdivision,andthechangeintheratioofoperating profittosalesfromoneyeartothenext.
Insummary,Web Co performedwellin Q2. Withthe exceptionof the workperformedby the IT However,therearetwiceasmanymarks availablefordiscussion
ofperformance asfor
departmentto makethe websitemoreavailable,allotherchanges have increasedsales and/or calculation
ofratios,somakesurethatyoucomment onthemeasures youhavecalculated.
increasedsubscribersto the onlinenewsletter.
Thoughfurtherinformationis requiredina numberof areas, it is clear that the businesshas
respondedwellto the changes and incentivesintroduced. Marking
scheme
Thecost of the webadvert ($200,000)was so highthat profitshave decreased substantially Marks
despite the incentivesand changes detailedabove. 0.5marks
percalculation Max 7
Workings Percomment
– twomarks perpoint 13
1 Increasein sales revenue 20
$2.75m– $2.2m/$2.2m=25%increase
2 Netprofit
Workings
Quarter1=$2.2m25%=$550,000 Division
S Division
C
A Yearonyear Yearonyear
Quarter2 =$2.75m16.7%=$459,250 N
S
W Increaseinsalesrevenue 44% 9%
G
3 Increasein orders E HG Increaseinmaterialcosts 36% 25% H
R Increaseinpayrollcosts 70% 15%

49,600 – 40,636/40,636=22% Increaseinproperty costs 78% 6%
S
4 Increasein numberof visitsto website Grossprofitmargin in20X3 56% 65%
141,714– 101,589/101,589=39.5% Grossprofitmargin in20X2 61% 67%
IncreaseinD&Mcosts 38% 18%
5 Customersaccessing websitethroughmagazineadvert Increaseinadministrationcosts 6% 0%
141,714× 19.9%=28,201 Netprofitmargin in20X3 11% 21%
Netprofitmargin in20X2 9% 22%
6 Increasein subscribersto newsletter Revenue peremployee in20X3 $102,224 $104,917
11,900– 4,600/4,600 =159% Revenue peremployee in20X2 $111,772 $104,828
Payroll
costperemployee in20X3 $27,000 $21,000
358 PAF Co Payroll
costperemployee in20X2 $25,020 $20,000
Totalmarketsize($revenue) in20X3(w1) $129.48m $80.12m
Totalmarketsize($revenue) in20X2(w1) $107.75m $77.61m
Workbookreference.Performancemeasurementis coveredinChapter 19of the BPPWorkbook. Working 1formarket size
Toptips. Thisquestionallowsyou to analyse performanceas muchas you can withinthe Division
S 20X3:$38,845m/30% =$129.48m Division C 20X3:$44,065m/55% =$80.12m
availabletime.Foreveryratio or other performancemeasurethat you calculate,be ready to
commenton its significance.Evenifa ratio does not seemsignificant,you can say so. Division
S 20X2:$26,937/25% =$107,75m Division
C 20X2:$40,359m/52% =$77.61m
Someratiosformeasuringperformancemightseemeasy to identify,but rememberto use the Note.Percentages havebeencalculated tothenearest1%
informationgiveninthe question.Thereare fiveitemsinparticularyou coulduse. Commentary
(1) Theaimfiveyears ago was to becomethe marketleaderinSista. Generaloverview
(2) DivisionS leftits pricesforproductsand servicesunchangedin20X3rather than Overall,
Division
S hasperformed wellin20X3,althoughithasnotmanaged tomeetitsobjective
increasingtheminlinewithits competitors– so increasesinsales volumeare downto sales ofbecoming market leaderdespite
its$2madvertising
campaign. Sinceithas30%ofthemarket
volumeentirely. in20X3andthereareonlytwocompetitors holding
70%ofthemarket between them,atleastone
(3) Skilledstaff are inshortsupply– so it is worthlookingat labourcosts. ofthosecompetitors musthold35%ormoreofthemarket.

Management
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Revenueand marketshare Netprofitmargin
Thishas increasedby a huge 44%inthe last year. Thiscomparesto an increaseof only9%in Despite challengingcostincreases inallcategories,
Division
S hasstillmanaged toincreaseits
DivisionC. However,part of the reason that thishas been achievedis because the changes infire NPMfrom9%to11%. However, thisissubstantially
lower
thantheNPMinDivision C, whichhas
safety lawsintroducedby the governmentat the end of 20X2have caused the marketforfire fallenslightly
butisstill21%,almost twicethatinDivision
S.Aswehaveseen,Division S'sGPMis
productsand servicesto increasefrom$107.75mto $129.48m.Part of DivisionS's successis lower thanDivisionC'sanywayand,ontopofthat,Division C hasnotsuffered a bigincreasein
thereforedownto increasedopportunity.However,DivisionS has also increasedits marketshare advertisingcostslikeDivision
S;norhaveadministrative costsriseninexplicably.
by a furtherfivepercentage pointscomparedto 20X2.DivisionC has onlymanaged a 3
percentage pointincreaseinits marketshare, so thisis a good resultby DivisionS. One can HeadOffice
assumethat thisis at least partly as a resultof the advertisingcampaigncarriedout by Division Thereisnoinformation givenaboutHeadOffice. IftheCalanaDivisionisalsotheHeadOffice,there
S. However,thisdid cost a large amount,$2m,and it did not quiteenablethe Divisionto achieve couldbeHeadOfficecostsincluded inCalana's
figures,
which wouldaffectthecomparisons being
its aimof becomingmarketleader. made. Further
informationisrequiredhere.
Materialscosts
359 CIM Co
Theincreaseinmaterialscosts is 36%,comparedto an increaseinrevenueof 44%.Itis difficultto
say whetherthisis good or bad sincethe increaseinrevenueincludesrevenuefromservices,for
whichno materialscosts wouldbe expectedto arise.Furtherinformationis needed on the splitof Workbook references.Performance measurement iscovered inChapters 19and20oftheBPP
revenuebetweenproductsand services. Workbook.
Payrollcosts, revenueper employeeand cost per employee Toptips.Forpart(a)makesureyouremember tojustifythefiguresyou've usedinyour
Payrollcosts have increasedby a massive70%and far morethan DivisionC's 15%increase.This calculation,
otherwise youwilllosetwomarks. Forpart(b),fullcreditisgivenforcalculations
whichfollowonfromyouranswer inpart(a).
is largelydue to the fact that DivisionS's employeenumbersincreasedfrom241in20X2to 380 in
20X3.Thisis a reallybig increaseinemployeenumbersand has been accompaniedby a fallin Easymarks. Part(d)ispureknowledge covered intheWorkbook andprovides easymarks.
revenueper employeefrom $111,772 in20X2to $102,224in20X3.Itis possiblethat DivisionS Examiningteam's comments. Anumber ofstudents werenotabletocalculate ROIinpart(a)and
over-recruited,as it hoped to securea greater levelof businessthan it did throughits advertising calculated
profitmarginsinstead.Inpart(b)manystudents didn'treadthebonus calculation
campaign.DivisionS's payrollcost per employeealso increasedfrom$25,020in20X2to $27,000 methodcarefullyenough. Part(c)wasgenerally welldone.
in20X3.Presumably,thisis because of the fact that there is highdemand forstaff skilledinthis
area and DivisionS has probablyhad to increasepay inorderto attract the calibreof staff which (a) Division
F
it needs. A
N
S Controllableprofit=$2,645k.
Increasein propertycosts W
G
E
R
HG
Totalassetslesstradepayables=$9,760k
+ $2,480k– $2,960k=$9,280k.
ROI=28.5%.
H
Inpercentage terms,the biggestincreaseincosts whichDivisionS has sufferedis inrelationto its

propertycosts. Theyhave increasedby 78%,comparedto DivisionC's 6%increase.Itwould S Division
N
appear that thisincreaseis due to the increasedrent charged by DivisionS's landlordson its Controllableprofit= $1,970k.
businesspremises,whichinturn has risenbecause of the increasedtax charges. However,it is
not possibleto quantifythispreciselywithoutfurtherinformationon rent increases. Totalassetslesstradepayables =$14,980k +$3,260k– $1,400k= $16,840k.
ROI=11.7%.
Gross profitmargin Inbothcalculations,controllable
profithasbeenusedtoreflect profit,
rather
thannet
profit.
Thisisbecause themanagers donothaveanycontrol overtheHeadOfficecosts;
Thishas actuallyfallenfrom 61%to 56%.DivisionC has also seen a fallinits GPM,but onlya two responsibility
accountingdeems thatmanagers shouldonlybeheldresponsible
forcosts
percentage pointfallas opposedto DivisionS's fivepercentage pointfall.ThereasonsforDivision whichtheycontrol. Thesameprinciple isbeingappliedinthechoiceofassetsfigures
being
S's lowerGPMare the highermaterial,payrolland propertycosts. Also,DivisionS did not try to used.Thecurrent assetsandcurrent liabilities
figures
havebeentakenintoaccount inthe
pass on any of its increasedcosts to its customersinthe formof higherprices. calculationbecause ofthefactthatthemanagers havefullcontrol
overbothofthese.
Distributionand marketingcosts (b) Bonus
Thesehave increasedby 38%comparedto DivisionC's 18%.However,whenyou take out the Bonus tobepaidforeachpercentage point= $120,000× 2%=$2,400.Maximum bonus =
advertisingcosts inboth years' figuresand workout the cost increasewithoutthem($8.522m– $120,000 × 0.3=$36,000.
$7.102m/$7.102m), it leavesan increaseof only20%.Thisincreasewouldbe expectedgiventhe
20%increaseinworldfuelpriceswhichoccurred.DivisionS has to deliverto a widergeographical DivisionF:ROI=28.5%=18whole percentage points
aboveminimum ROIof10%.
spread of customersthan DivisionC, so it wouldbe expectedto feelthe fullbrunt of fuelprice 18×$2,400=$43,200.
increases.
Thereforemanager willbepaidthemaximum bonusof$36,000.
Administrativecosts
DivisionN:ROI=11.7% =1whole percentage pointaboveminimum.
Thesehave increasedby 6%comparedto DivisionC's lessthan 1%increase(0%whenrounded
downto the nearest percent). Thereforebonus = $2,400.
Furtherinformationisneeded about the itemsincludedinthese cost figuresto explainwhythis
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(c) Discussion 360 Man Co
 Themanager ofDivisionNwillbepaida farsmaller bonus thanthemanager of
DivisionF.Thisisbecause ofthelargeassetbaseonwhichtheROIfigurehasbeen
calculated. TotalassetsofDivision Narealmost double thetotalassetsofDivision F. Workbook reference.
Transferpricingiscovered
inChapter 20oftheBPPWorkbook.
Thisislargelyattributable tothefactthatDivision Ninvested $6.8minnew Toptips.Part(a)isfairlystraightforward,
sodon'tfallintothetrapofthinking
that'smore
equipment during theyear.Ifthisinvestment hadnotbeenmade,netassetswould complicatedthanitis.It'sonlyworth threemarks.
Makesurethatyoureadthequestion again
havebeenonly$10.04m andtheROIforDivision Nwould havebeen19.62%. This carefully
beforeattempting part(c).
would haveledtothepayment ofa $21,600 bonus (9$2,400)rather thanthe Easymarks.Part(d)ispureknowledge
covered
intheWorkbookandprovides
easymarks.
$2,400bonus. Consequently, Division N'smanager isbeingpenalised formaking
decisions whichareinthebestinterests oftheirdivision. Itisverysurprising thatthey Examiningteam'scomments.Moststudents
gotpart(a)wrong,
perhaps
becausetheyexpected
itto
diddecide toinvest, giventhattheyknewthattheywould receive a lower bonus asa bemoredifficult
thanitwas.Part(b)wasattempted
bymost students.
Inpart(c)somestudents
failed
result.
Theyhaveactedtotallyinthebestinterests ofthecompany. Division F's tonotice
thatthedivisions
hadautonomy.
manager, ontheotherhand,hasbenefitted fromthefactthattheyhavemadeno
investment – eventhough itisbadlyneeded. Thisisanexample ofsub-optimal (a) Maximising
groupprofit
decision-making. Division
Lhasenough
capacitytosupplybothDivision
Manditsexternal
customers
with
 DivisionF'stradepayables figureismuchhigher thanDivision N's.Thisalsoplaysa componentL.
partinreducing thenetassetsfigureonwhichtheROIhasbeenbased.Division F's Therefore,
incrementalcostofDivision
Mbuyingexternally
isasfollows:
tradepayables areoverdouble thoseofDivision N.Inpart,onewould expect this
because salesareover50%higher (nopurchases figureisgiven).However, itisclear Costperunitofcomponent Lwhenboughtfromexternalsupplier:
$37
thatitisalsobecause oflowcashlevels atDivision F.Thefactthatthemanager of CostperunitforDivision
Lofmaking component
L:$20.
DivisionF isthenbeingrewarded forthis,eventhough relationships withsuppliers
maybeadversely affected, isagainanexample ofsub-optimal decision-making. Therefore
incremental
costtogroupofeachunitofcomponent Lbeingbought inby
Division
Mratherthantransferredinternally:
$17($37– 20).
 Ifthecontrollable profitmargin iscalculated, itis18.24% forDivision F and22.64%
forDivision N.Therefore, ifcapitalemployed isignored, itcanbeseenthatDivision N Fromthegroup's pointofview,themostprofitable
courseofactionistherefore
thatall
isperforming better.
ROIissimply making thedivision's performance lookworse 120,000unitsofcomponent Lshould betransferred
internally.
because ofitsinvestment inassets. Division
N'smanager islikelytofeelextremely (b) Calculatingtotalgroupprofit
demotivated bytheircomparatively smallbonus and,inthefuture, theymaychoose A
N
S
W Totalgroupprofitswillbeasfollows:
G topostpone investment inordertoincrease theirbonus. Managers notinvesting in E HG H
newequipment andtechnology willmeanthatthecompany willnotkeepupwith R DivisionL:

industry changes andaffectitsoverall futurecompetitiveness. Contributionearnedpertransferredcomponent=$40– $20=$20
S
 Tosummarise, theuseofROIisleading tosub-optimal decision-making anda lack Profitearnedpercomponent soldexternally
=$40– $24=$16
ofgoalcongruence, aswhatisgoodforthemanagers isnotgoodforthecompany $
andviceversa.Luckily, themanager atDivisionNstillappears tobeactingforthe 120,000$20 2,400,000
benefitofthecompany buttheothermanager isnot.Thefactthatonemanager is
receiving a muchbiggerbonus thantheotheristotallyunfair hereandmayleadto 160,000$16 2,560,000
conflict
inthelongrun.Thisisnotgoodforthecompany, particularlyiftherecomes 4,960,000
a timewhenthedivisions needtoworktogether. Lessfixedcosts (500,000)
Profit 4,460,000
(d) Stepsthatcouldbetakentoencourage managers totakea long-term view,sothatthe
'ideal'decisionsaretaken,include thefollowing. DivisionM:
(i) Making short-term targetsrealistic. Ifbudget targets areunrealistically tough,a Profitearnedpercomponent
soldexternally
=$27– $1=$26
manager willbeforcedtomaketrade-offs between theshortandlongterm. $
(ii) Providing sufficient management information toallowmanagers toseewhattrade- 120,000×$26 3,120,000
offstheyaremaking. Managers mustbekeptawareoflong-term aimsaswellas Lessfixedcosts (200,000)
shorter-term (budget)targets. Profit 2,920,000
(iii) Evaluating managers' performance interms ofcontribution tolong-term aswellas Totalprofit 7,380,000
short-term objectives.
(c) Problems
withcurrent
transfer
priceandsuggested
alternative
(iv) Linkmanagers' rewards toshareprice.Thismayencourage goalcongruence.
Theproblem isthatthecurrenttransfer
priceof$40perunitisnowtoohigh.Whilethishas
(v) Setquality-based targetsaswellasfinancial targets. Multiple targets canbeused. notbeena problem before,sinceexternal
suppliers
werecharging $42perunit,itisa
problem nowthatDivision
Mhasbeenoffered componentLfor$37perunit.IfDivision M
nowactsinitsowninterests rather
thantheinterests
ofthegroupasa whole, itwillbuy
component Lfromtheexternal supplier
ratherthanfromDivisionL.Thiswillmeanthatthe
profits
ofthegroupwillfallsubstantially
andDivisionLwillhavesignificant
unused
capacity.
Answers287 288 Performance

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Consequently,DivisionLneedstoreduce itsprice.Thecurrentpricedoesnotreflect the
factthattherearenosellinganddistribution
costsassociated withtransferring
internally, Markingscheme
iethecostofsellinginternally
is$4lessforDivisionLthansellingexternally.
So,itcould
reduce thepriceto$36andstillmakethesameprofitonthesesalesasonitsexternal Marks
sales.Thiswouldthereforebethesuggested transferprice,sothatDivision
Misstillsaving (a) Ratios
$1perunitcompared totheexternalprice.Atransferpriceof$37would alsopresumably CalculatingROCE 1.5
beacceptable toDivisionMsincethisisthesameastheexternal supplier
isoffering. Calculatingasset turnover 1.5
(d) (i) Divisionalisation
canimprove thequalityofdecisions madebecause divisional Calculatingoperatingprofitmargin 1.5
managers (thosetakingthedecisions)
knowlocalconditions andareabletomake Marksper validcomment(max5.5) 5.5
moreinformed judgements.Moreover,withthepersonal incentive
toimprove the 10
division's
performance,theyoughttotakedecisions inthedivision's
bestinterests. (b) Transferpricing
Eachvalidcomment/calculation 1.5
(ii) Decisionsshould
betakenmorequicklybecauseinformation
doesnothavetopass 10
alongthechainofcommand toandfromtopmanagement. Decisions
canbemade 20
onthespotbythosewhoarefamiliarwiththeproduct
linesandproduction
processesandwhoareabletoreacttochangesinlocalconditions
quickly
and
efficiently.
(a) Financialratios
(iii) Theauthority
toacttoimproveperformance
should motivate
divisional
managers.
WCo WCo
(iv) Divisional
organisation
freestopmanagement fromdetailed
involvement
inday-to- Design Gearbox
C Co
dayoperations
andallows themtodevote
moretimetostrategic planning. Returnon Profitbeforeinterestandtax $6,000/$23,540 $3,875/$32,320 $7,010/$82,975
(v) Divisionsprovide
valuabletraining
grounds
forfuture membersoftopmanagement capital
Capitalemployed
% =25.49% =11.99% =8.45%
bygivingthemexperience
ofmanagerial
skillsina lesscomplex
environment
than employed
thatfacedbytopmanagement. Sales $14,300/$23,54 $25,535/$32,32 $15,560/$82,97
Assetturnover
(vi) Ina largebusiness
organisation,
thecentralheadofficewillnothavethe Capitalemployed 0 =0.61times 0 =0.79times 5=0.19times
management resources
orskillstodirectoperations
closelyenoughitself.Some
authoritymustbedelegated
tolocaloperationalmanagers. Operatingprofit Profitbeforeinterestandtax $6,000/$14,300 $3,875/$25,535 $7,010/$15,560
A
N margin % =41.96% =15.18% =45.05%
S Sales
Notethatyouwould probablyneedtohavediscussed threeoftheabovepoints togetfive W
G
marks. E
R
HG
Returnon capital employed

H
361 Rotech group ROCEshowshowmuchprofithas been made inrelationto the amountof resources
S
invested.C Co and both divisionsof WCo are profitable.TheDesigndivisionof WCo has
the highestROCE,at over25%,whilethe Gearboxdivisionand C Co are significantlylower
Workbook references.Performance measurement iscoveredinChapters 19and20. at 11.99%and 8.45%respectively.Thisis primarilydue to the nature of the designbusiness
Toptips.Usea clearlayoutforyourcalculations andheadings togivea structure
toyour whichderivesits profitsfrompersonnelrather than physicalassets. Employeesgenerate
discussionsandexplanations. Eachpartofthequestion canbeanswered separately,
soifyou profitsby designingproducts,rather than by usingexpensivemachinery.Thereforethe
getstuckorareunsure whatisrequired,moveon. Designdivision'scapital employed(asset)figureis significantlylower.
Easymarks. Thecalculationsarestraightforwardandthereareplentyofmarks available
for C Co has the largest asset base, and thisis reflectedina relativelylowROCE.The
common senseexplanations. Gearboxdivisionis closerto thisthan to the Designdivision,but thisis as a resultof
similaritiesinthe nature of the businessrather than divisionperformancealone.
Examining team's comments. Thecalculations
inthefirstpartofthequestion weredonequite
well,althougha common mistakewastocombine thetwodivisionsofWCoandcalculate the Assetturnover
ratiosforWCoasa whole. Thiswaspresumably caused byinsufficient
reading ofthe Assetturnoveris a measureof howwellthe assets of a businessare beingused to generate
requirement.Students haddifficulty
dealingwiththediscussion thatfollowedthecalculations, sales.TheGearboxdivisionhas the highestlevelat 79%,whileC Co has the lowestat 19%.
withcandidates failingtoidentify
thedifficulty
comparing a designbusinesstoa manufacturing Thisis probablydue inpart to the fact that the Gearboxdivisionbuys fromC Co, therefore
business. C Co mustholda large asset base to producethe relevantcomponents.Bothdivisionsof
WCo do not have the same requirementand thisis reflectedinthe higherasset turnover
figures.
Operatingprofitmargin
C Co comesout on top inthe finalprofitabilitymeasure,whichis the operatingprofit
marginat justover45%,whilethe Gearboxdivisionis the lowestat 15.18%.TheDesign
divisionperformswellat 41.96%,as it did inasset turnover.Thiswas to be expectedfrom
the ROCEof 25%,whichis a combinationof the othertworatios.TheDesigndivisionhas
both highunitprofitabilityand generates sales at a highlevelcomparedto its asset base.
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Thereare limitationsto these types of comparisonsdue to the differingnature of the
businesses.Itwouldbe moreusefulto compareeach businessunitto an industryaverage Markingscheme
forsimilarbusinesses,as wellas comparingyear-on-year figuresto monitorthe unitson an
ongoingbasis. Marks
(b) Transferprices (a) Calculations 2
FromC Co's perspective (b) Accuracyof statement
Firstpart untrue,Expresshigherpercentage 1
C Co transferscomponentsto the Gearboxdivisionat the same priceas it sells Correctre what customersvalue 1
componentsto the externalmarket.However,ifC Co werenot makinginternalsales then, Correctre punctuality 1
giventhat it already satisfies60%of externaldemand, it wouldnot be able to sellallof its Incorrectre leader 1
currentproductionto the externalmarket.Externalsales are $8,010,000,therefore 4
unsatisfiedexternaldemand is ([$8,010,000/0.6]– $8,010,000)=$5,340,000. (c) Efficiencyand effectiveness:
Definitionof efficiency 1
FromC Co's perspective,of the currentinternalsales of $7,550,000,$5,340,000couldbe Performancemeasureforefficiency 1
soldexternallyifthey werenot soldto the Gearboxdivision.Therefore,inorderforC Co Definitionof effectiveness 1
not to be any worseofffromsellinginternally,these sales shouldbe made at the current Performancemeasureforeffectiveness 1
priceof $5,340,000,lessany reductionincosts whichC Co savesfromnot havingto sell 4
outsidethe group(perhapsloweradministrativeand distributioncosts). (d) Balancedscorecardapproach:
Asregardsthe remaininginternalsalesof$2,210,000($7,550,000– $5,340,000),C Co Statingwhat it is 2
effectivelyhas spare capacityto meetthesesales.Therefore,the minimumtransferprice Financialperspective 2
shouldbe the marginalcost ofproducingthesegoods.Giventhat variablecostsrepresent Customerperspective 2
40%ofrevenue,thismeansthat the marginalcost forthesesalesis$884,000.Thisis Internalperspective 2
thereforethe minimumpricewhichC Co shouldcharge forthesesales. Learningand growthperspective 2
10
Intotal, therefore,C Co willwant to charge at least $6,224,000forits sales to the Gearbox 20
division.
Fromthe Gearboxdivision'sperspective (a) Calculations
A
TheGearboxdivisionwillnot want to pay moreforthe componentsthan it couldpurchase N
S Bus:(0.4 ×0.67)+(0.32×0.8)+(0.28×0.82)=75.36%
themforexternally.Giventhat it can purchase themallfor95%of the currentprice,this W
G
E
R
HG
Prime:(0.4 ×0.58)+(0.32×0.76)+(0.28×0.83)=70.76% H
means a maximumpurchase priceof $7,172,500. Express:(0.4 ×0.67)+(0.32×0.76)+(0.28×0.89)=76.04%

Overall S (b) Accuracyof statement
Takingintoaccount allof the above,the transferpriceforthe sales shouldbe somewhere TheMD'sstatement says that BusCo's customersare the mostsatisfiedof any national
between$6,224,000and $7,172,500. bus operator. However,thisis not quitethe case since,whenthe 'overallsatisfaction'levels
are calculated,Express'slevelis 76.04%comparedto BusCo's 75.36%.So,the firstpart of
362 Bus Co the MD'sstatement is untrue.
TheMDthen goes on to say that BusCo isleadingthe way on what matters mostto
customers– valueformoneyand punctuality.Giventhe weightingsattached to these two
Workbookreferences.Valueformoneyis coveredinChapter 21.Thebalanced scorecard criteria,it appears true to say that these are the factors whichmatter mostto customers.
approach to performancemeasurementis coveredinChapter 19. Similarly,it is true to say that BusCo is leadingas regards punctuality,beingfour
Toptips. Part (a) is fairlystraightforward.Forpart (b),lookat each pointinturn. Part (c)requires percentage pointsahead of Primeand Expresson thiscriterion.However,giventhat
you to defineefficiencyand effectivenessand thisis somethingyou shouldhave learnt.Make Expressalso has the same levelof satisfactionas regards offeringvalueformoney,BusCo
youranswerto part (d)easy to mark.Start witha shortintroduction,then writea littlebit about is onlyleadingahead of Primeon thiscriterion,not ahead of Express.Therefore,whileit
each perspectiveunderseparate headings. can say that it is the leaderon punctuality,it can onlysay that it is the jointleaderon
valueformoney.
Easymarks.Youshouldscorehighlyinpart (d)providingyouranswercoversallfourperspectives
of the balanced scorecard. (c) VFM
'Efficiency'focuseson the relationshipbetweeninputsand outputs,consideringwhether
Examiningteam's comments.Asignificantnumberof students misinterpretedpart (b)and the maximumoutput is beingachievedforthe resourcesused.
discussedthe performanceof the companyand howit mightimprove.However,a pleasing
numberof students scoredverywellon part (c),applyingthe knowledgeto the informationinthe Performancemeasure:
question. Occupancyrate of buses
Utilisationrate forbuses (utilisationrate =hourson the road/total hoursavailable)
Utilisationrate fordrivers
(Manyotherscouldbe giventoo, but onlyone was asked for.)
'Effectiveness'focuseson the relationshipbetweenan organisation'sobjectivesand
outputs,consideringwhetherthe objectivesare beingmet.
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Possibleperformancemeasures:
Examining team's comments. Performance
onthisquestion
wasreasonably strong,
although
Percentageof customerssatisfiedwithcleanlinessof buses poorexamtechnique inaddressingthespecific
requirement
didletsomestudentsdown.Akey
Percentageof carbon emissionsrelativeto target set skillinthesequestions
istoidentify
linkages
betweenmeasures– causeandeffectrelationships.
(Manyotherscouldbe giventoo, but onlyone was asked for.) Forexample, newlendingtoSMEswasdownontargetandthisisnotinlinewiththebank's third
Balancedscorecard value(financial
perspective).
Thedropinnewlendingisduetothefactthatfewercolleagues
(d) havebeentrained toprovideadvicetoSMEs(learning
andgrowth perspective).
Thebalanced scorecardapproachto performancemeasurementemphasisesthe need to
providemanagementwitha set ofinformationwhichcoversallrelevantareas of
performanceinan objectiveand unbiasedfashion. Marking
scheme
Theinformationprovidedmay be both financialand non-financialand coverareas such as Marks
profitability,customersatisfaction,internalefficiencyand innovation.
Thebalanced scorecardfocuseson fourdifferentperspectives,as follows. (a) Discussion 4
Customerperspective (b) Financial 4
Thecustomerperspectiveconsidershownewand existingcustomersviewthe organisation. Customer 4
Thisperspectiveshouldidentifytargets that matterto customers,suchas cost,quality, Internal 4
delivery,inspectionand so on. Learning 4
Thecustomerperspectiveis linkedto revenue/profitobjectivesinthe financialperspective. 16
Ifcustomerobjectivesare achieved,it is likelythat revenue/profitobjectiveswillalso be 20
achieved.
Performancemeasure:numberof repeat tripsto measurecustomerretention.
Internalperspective (a) Thebalanced scorecard approach looksnotonlyatthefinancial performance butalso
non-financialperformance. Inordertomaintain a competitiveedge,organisations haveto
Theinternalperspectivemakesan organisationconsiderwhat processesit mustexcelat in beveryawareofthechanging needsoftheircustomers. InthecaseofThePeople's Bank,
orderto achievefinancialand customerobjectives. thishasinvolved identifyingspecific categoriesofcustomers whichhaveparticular needs,
Theperspectiveaimsto improveinternalprocessesand decision-making. likeSMEsina commercial context, orlikethedisabledorvisually impaired ina non-
A commercial context. Thispermits theseneedstobeaddressed.
Performancemeasure:costs saved after reassessinginternalprocesses. N
S
W ThePeople's Bankhasa vision andstrategy whichgoesfarbeyond justmaking money.
G
Innovationand learningperspective E
R
HG H
Theywanttohelpthecommunity anddisadvantaged people andgivesomething backto

Theinnovationand learningperspectiverequiresthe organisationto considerhowit can customers also.Hence, byusingthebalanced scorecard,performance measures which
continueto improveand create value. S
addresswhether theBankisbeingsuccessful inpursuing theirvisioncanbeincorporated.
Organisationsmustseekto acquirenewskillsand developnewproductsinorderto
maintaina competitivepositionintheirrespectivemarket(s)and providea basis fromwhich Inaddition,froma purely business perspective,ifemployees andcustomers arevalued and
the other perspectivesof the balanced scorecardcan be accomplished. internal
processes areefficient,anorganisation should havemorechanceofachieving
long-termsuccess anyway. So,evenputting asidethesocialobjectives ThePeople'sBank
Performancemeasure:revenuegenerated fromnewroutesintroduced. has,thebalanced scorecard canbeuseful toThePeople's Banktomeasure theseother
Financialperspective aspectsoffuture success too.
Thefinancialperspectiveconsiderswhetherthe organisationmeetsthe expectationsof its (b) Theperformance ofthebankwillbeconsidered undereachoftheheadings usedinthe
shareholdersand howit creates valueforthem. balanced scorecard:
Thisperspectivefocuseson traditionalmeasures,such as growth,profitabilityand cost Financialperspective
reduction.
ThePeople's Bankhashada yearofmixed success whenlooking attheextent towhichit
Performancemeasure:increaseinmarketshare comparedto Primeand Express. hasmetitsfinancial targets.Itsreturnoncapitalemployed (ROCE)shows howefficiently it
hasuseditsassetstogenerate profitforthebusiness.Thetargetfortheyearwas12%but
363 People's Bank ithasonlyachieved an11% return. ThePeople's Bank'sinterestincome, however, wasin
fact$0.5mhigher thanitstarget,whichisgood.Thismayhavebeenachieved byoffering
slightly
betterinterest ratestocustomers thancompeting banks,astheinterest marginThe
Workbookreferences.Thebalanced scorecardapproach to performancemeasurementis People'sBankachieved isslightly
lower thantarget.Themostlikelyreason fortheunder
coveredinChapter 19. targetROCEistherefore probably theinvestment whichThePeople's BankhasmadeinIT
Toptips. Part (a) is fairlystraightforwardbut makesure you use the informationinthe scenario security
andfacilities forthedisabled andvisually impaired.Whilst thismayhavereduced
to helpyou answerthe question.Forpart (b),makesure you structureyouranswerusingthe four ROCE,thisinvestment isessentiallya goodideaasithelpsThePeople's Bankpursue its
headingsof the balanced scorecard.Thisquestionrequiresyou to analyse the informationgiven vision
andwillkeepcustomers happy.Itwillalso,inthecaseoftheITsecurity investment,
and spot howfactors affect one another. Don'tforgetto finishwitha briefconclusion. preventthebankanditscustomers fromlosingmoney fromfraudinthefuture.
Easymarks.Youshouldscorehighlyinpart (b)providingyouranswercoversallfourperspectives Theotherperformance measure, theamount ofnewlending toSMEs,isa littlebit
of the balanced scorecardand picksout informationfromthe scenario.Thereis not a great deal disappointing,givenThePeople's Bank's statedvalueofmaking a differenceto
of technicalknowledgerequired. communities. Thefailure tomeetthistargetmaywellbelinked tothefactthatan

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insufficientnumberof staff weretrainedto provideadviceto SMEsand consequently,
fewerof themmay have been successfulinsecuringadditionalfinance. Markingscheme
Customerperspective
Marks
Withregard to its customers,ThePeople'sBankhas performedwellinthe year. Ithas
exceededits target to providemortgagesto newhomeownersby 6,000. Thisis helpingThe (a) (i) Netprofit 1
People'sBankpursueits visionof helpingnewhomeowners.Ithas also managed to beat Addback depreciation 1
the target forcustomercomplaintssuch that there are only1.5complaintsforevery1,000 Addback HOcosts 1
customers,wellbelowthe target of 2. Thismay be as a resultof improvedprocessesat the Controllableprofit 1
bank or improvedsecurity.Itis not clear what the precisereason is but it is definitelygood Averageassets 1
forThePeople'sBank'sreputation.
ROI 1
Thebank has also exceededboth of its targets to helpthe disabledand visuallyimpaired, 6
whichis good forits reputationand its stated valueof makingservicesmoreaccessible.
(ii) Discussion 6
Internalprocesses
Thenumberof processessimplifiedwithinthe bank has exceededthe target, whichis good, (b) (i) Controllableprofit 1
and the successof whichmay wellbe reflectedinthe lowercustomercomplaintslevels. Imputedinterest 1
Similarly,the investmentto improveITsystemshas been a success,withonlythree RI 1
incidencesof fraud per 1,000customerscomparedto the target of 10.However,perhaps Comment 1
because of the focuson thispart of the business,onlytwonewserviceshave been made
availableviamobilebanking,instead of the target of five,whichis disappointing.Similarly, 4
it is possiblethat someof the newsystemshave preventedthe businessfromkeepingits (ii) Advantages/disadvantages 4
CO2emissionsto theirtarget level. 20
Learningand growth
ThePeople'sBankhas succeededinhelpingthe community,exceedingboth of its targets
relatingto hoursof paid volunteerworkand numberof communityorganisations (a) (i) Returnon investment=controllableprofit/averagedivisionalnet assets
supportedby volunteersor funding.Theseadditionalcosts couldhave contributedto the A Controllableprofit
N
S
fact that the bank did not quitemeet its target forROCE. W DivisionC DivisionE
G
E
R
HG
$'000 $'000
H
However,the bank has not quitemet its targets forhelpingsmallbusinessesand helping

the disadvantaged.Asmentionedearlier,the shortfallintrainingof employeesto give Netprofit 1,455 3,950
adviceto SMEsmay have had an impacton ThePeople'sBank'sfailureto meet its target S Addback depreciationon non-controllableassets 49.5 138
lendingto SMEs.Asregards the percentage of traineepositions,the target was onlyjust Addback HeadOfficecosts 620 700
missedand thismay wellhave been because the numberof candidates applyingfrom Controllableprofit 2,124.5 4,788
these areas was not as highas plannedand the bank has no controloverthis.
Averagedivisionalnet assets
Overall,the bank has had a fairlysuccessfulyear, meetingmany of its targets. However,it DivisionC DivisionE
stillhas someworkto do inorderto meet its stated valuesand continueto pursueits vision. $'000 $'000
Openingassets 13,000 24,000
364 Sports Co Closingassets 9,000 30,000
Averageassets 11,000 27,000
Workbookreference.Returnon investment(ROI)is coveredinChapter 20 ROI 19.3% 17.7%
Toptips. Questionson returnon investmentare oftenunpopularwithstudents.One of the key (ii) WhilstDivisionC has exceededthe target ROI,DivisionE has not. Ifcontrollable
thingsthat you need to realise,is that ROIshouldbe calculatedusing'controllable'figuresonly. profitinrelationto revenueis considered,DivisionC's marginis 56%comparedto
Sothe formulaforROIis controllableprofit/ controllablenet assets. Sopart (a)(i)requiresyou to DivisionE'smarginof 57%,so DivisionE is actuallyperformingslightlybetter.
calculatethe controllableprofitfirstand then divideit by the average controllablenet assets. However,DivisionE has a largerasset base than DivisionC too, hence the fact that
Makesure you showyourworkingsso that markercan clearlysee 'what' you have dividedby DivisionC has a higherROI.
'what'!Forpart (a)(ii)thisis yourchance to showoffwhat you knowabout the relationship SinceDivisionE appears to be a muchlargerdivisionand is involvedinsports
betweenROI,investmentinassets and depreciation.Makesure you referto the scenariowhen equipmentmanufacturing,then it couldbe expectedto have moreassets. Division
you makea point.Part (b)(i)is a calculationinvolvingcontrollableprofitagain so makesure you E'sassets have gone up partly because it made substantialadditionsto plant and
use the same profitfigurethat you calculatedin(a). machinery.Thismeans that as wellas increasingthe average assets figure,the
Easymarks.Part (b)(ii)is a gift.Youshouldknowthe advantages and disadvantagesof residual additionswillhave been depreciatedduringthe year, thus leadingto lowerprofits.
income. Thismay potentiallyhave had a large impacton profitssinceDivisionE uses the
reducingbalance methodof depreciation,meaningthat moredepreciationis
charged inthe earlyyears.
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q q
Basedon the ROIresults,the manager of DivisionC willget a bonusand the
manager of DivisionE willnot. Thiswillhave a negativeimpacton the motivation Marking
scheme
levelof the manager of DivisionE and may discouragehimfrommakingfuture
investments,unlessa change inthe performancemeasureused is adopted. Marks
(b) (i) (a) External sales- A/B 1
DivisionC DivisionE
Internalsales- A 0.5
$'000 $'000
Controllableprofit 2,124.5 4,788 External materials- A/B 1
Less:imputedcharge on assets at 12% (1,320) 3,240) Internalcosts- B 0.5
Residualincome 804.5 1,548 Labour costs- A/B 1
Othercosts- A 1
Fromthe residualincomeresults,it can clearlybe seen that both divisionshave
performedwell,withhealthyRIfiguresof between$0·8mand $1·55m.Thecost of Fixedcosts 0.5
capital of SportsCo is significantlylowerthan the target returnon investmentwhich Profit- A/B 1
the companyseeks,makingthe residualincomefigureshowa morepositiveposition. PGCCofigures 2.5
(ii) Advantages 9
(b) External
contof$7- A 1
Theuse of RIshouldencouragemanagers to makenewinvestments,ifthe
investmentadds to the RIfigure.Anewinvestmentcan add to RIbut reduceROIand Incremental
costof$6 1
insuch a situationmeasuringperformancewithRIwouldnot resultinthe External
salesfirst- A 1
dysfunctionalbehaviourwhichhas already been seen at SportsCo. Instead,RIwill 150,000fromA/30,000externally 1
lead to decisionswhichare inthe best interestsof the companyas a wholebeing Approach 2 6
made.
Sincean imputedinterestcharge is deducted fromprofitswhenmeasuringthe (c) Minimum
transferprice(marginalcost+opportunity
cost) 1
performanceof the division,managers are made moreaware of the cost of assets Opportunity
cost- lostcontribution
$7 1
undertheircontrol.Thisis a benefitas it can discouragewastefulspending. Addmarginal
costfortransferpriceof$14 1
Alternativecosts of capital can be appliedto divisionsand investmentsto account A Approach 2 5
N
S
fordifferentlevelsof risk.Thiscan allowmoreinformeddecision-making. W 20
G
E
R
HG H
Disadvantages
RIdoes not facilitatecomparisonsbetweendivisionssincethe RIis drivenby the size S
of divisionsand theirinvestments.Thiscan clearlybe seen inSportsCo wherethe RI (a) Profitstatement
forcurrent
position:
of DivisionE is almosttwicethat of DivisionC, whichwillbe related to DivisionE Division
B Division
A PGCC0
beinga muchlargerdivision. $'000 $'000 $'000
RIis also based on accountingmeasuresof profitand capital employedwhichmay Salesrevenue:
be subjectto manipulationso as, forexample,to obtaina bonuspayment.Inthis Externalsales(150,000 $180,000/200,000
$15) 27,000 3,000 30,000
way it suffersfromthe same problemsas ROI. Internal
transferredsales(150,000 $13) 1,950
365 Portable Garage Co Totalrevenue 27,000 4,950 30,000
Variablecosts:
Externalmaterialcosts 6,750 1,050 7,800
Workbookreference.Transferpricingis coveredinChapter 20. Internal
transferredcosts 1,950
Toptips. Thisquestiontests transferpricingprincipleswithoutbeingoverlycomplicated.Ifyou Labour costs 5,250 ,400 6,650
are wellprepared you shouldscorehighlyinpart (a).Part (b)asks you to explainsomething Othercostsofexternal sales 200 200
whichmay be intuitiveto you.Part (c)is probablythe hardest part of the questionand requires Totalvariablecosts 13,950 2,650 4,650
you to rememberthat whenthere is no spare capacity, the transferpriceis marginalcost + Contribution 13,050 2,300 5,350
opportunitycost. Lessfixedcosts 5,460 2,200 7,660
Easymarks.Youshouldpickup plentyof easy marksinparts (a) and (b). Profit 7,590 100 7,690
(b) IfDivision
Bcanbuyadaptors fromoutside thegroupat$13perunit,thentheoptimum
position
isforDivision
Atosellasmanyadaptors aspossibletoexternal
customersat$15
eachandthenselltheremainder toDivision Bata pricetobeagreed between them.
Thiswould meanthatDivision Acontinues tosellDivision
B150,000adaptors butDivision
B
thenbuystheremaining 30,000adaptors fromanexternal supplier.
Thisisbecausethe
contribution
perunitforDivisionA'sexternalsalesis$7($15– $3– $4– $1).Thismeans
thatforeveryexternalsaleitloses,itforfeits
$7forthegroup.However, theincremental

Management
(PM)
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q q
costforthegroupofDivision Bbuyingadaptors fromoutside thegroupisonly$6($13 Asthere was presumablya pay riseinthe year too, it is clear that a proportionateamount
external costlessthe$7costofmaking themin-house). So,itmakes senseforDivision
Ato of newstaff werenot recruited.Thisfailingisalso reflectedby the fallinthe answerto
satisfyitsexternalsalesfirstbeforeselling
internally. question2 from86%to 82%,withstudents beinglesssatisfiedin20X6withthe adviceand
supportthey have received.Also,the staff retentionrate has gone downin20X6,meaning
(c) InorderforDivision AtosupplyDivision Bwith180,000adaptors, itwouldhavetoreduce that staff are lessfamiliarwithRUand thereforemorelikelyto providea fragmented
itsexternalsalesfrom200,000unitsto170,000. Thisisbecause itonlyhasenough spare service.
capacitytosupplyDivision Bwith150,000unitsatpresent afterithassuppliedadaptorsto
itsexternalcustomers. However,in20X574%of employerswerehappy withthe graduates they recruited,in20X6
thisdroppedto 72%.Inaddition,in20X5only65%of students have managed to obtain
Theminimum transfer
priceinsituations wherethereisnosparecapacityismarginal cost graduate jobswithina year comparedto previousyears. Giventhat RUhas relaxedthe
plusopportunity cost.Inthiscase,contribution
islostbynotselling 30,000unitstothe entry requirementsforstudents in20X6,thismay mean that its 20X6recruitsare not as
external customers.Asthemarginal costforDivisionA'sinternal
salesis$7($4+$3)and wellqualifiedas its 20X5.Thiscouldmean that inthe futurethe numberof graduates
thecontribution perunitforexternal salesis$7perunit($15– $3– $4– $1),thetransfer obtaininggraduate jobswithina year and the satisfactionpercentages of employerscould
pricefortheadditional 30,000unitswould needtobe$14. fallfurther.Thisdecisionhas meant that there has been a 23%increaseinfee income,but
it compromisesRU'sabilityto meet its firststrategicaim.
366 Robinholt University
(2) Toprovidean organised,efficientlearningenvironmentwithaccess to cutting edge
technologyand facilities.
Workbook reference.
PerformancemeasurementincoveredinChapter 19although thisquestion Asregards premises,the moneyspent on maintainingthese has decreased by 10%in20X6,
doesnotrequiremuchtextbookknowledge. despitethe increasedstudent numbers.Inthe NOSsurvey,the percentage of students
Toptips.Useheaded paragraphstodiscuss
eachofthestrategicaims.Muchofyourdiscussion satisfiedwiththese facilitieshas gone downninepercentage pointsfrom92%to 83%.This
shouldbebasedoncommon senseandinformation
giveninthescenario.Remember thereare suggeststhat thisparticularstrategicaimhas been neglected.Studentsseemfar less
onlyfourmarksforcalculations
soquicklycalculate
thepercentagedifferencesbetween thetwo satisfiedwiththe way that the coursesare run and administerednow,witha fallof nine
yearssothathavesomenumbers todiscuss.
Whenyoudiscuss a number, trytobringinsome percentage pointsinanswersto question4. Administrationstaff costs have onlyincreased
information
giveninthescenario
thatmightexplain
whythenumber hasincreased ordecreased. by 5%despitea 13%increaseinstudent numbersand, presumably,a pay riseduringthe
year. Itcan be inferredthat staff are underincreasingpressureand unableto cope with
Easymarks.
Thereareeasymarks available
forpercentage
changecalculations
andforsaying the increasednumbers.Thisisagain reflectedby the fallinthe staff retentionrate from
whether
ornoteachofthefivestrategic
aimshasbeenmet. 90%in20X5to 75%in20X6.
A
N (3) Tobe a leader in sustainable businesspractices whichprotect the environmentand
Marking
scheme S
W support localpeople
G
E
R
HG H
Marks Aswiththe abovestrategicaim,thisone also seemsto have been a littleforgottenin20X6.

S In20X5,RUwonan environmentalaward forits campuses.Italso tookpart ina food
Calculations 4 sharinginitiativewhichhelpedthe localcommunity.Ithas nowgot ridof its recyclingbins
Strategic
aimsdiscussion 16 and ceased to be involvedinthe foodshare project.RU'sspendingon sustainabilityand
20 communityassistance has actuallyhalvedin20X6.Thisdeclineinactivityis partly
attributableto staff shortages.Allinall,thisis not verygood as RUis nowfailingto meet
one of its mainstrategicaims.
(1) Toprovide
education whichpromotes
intellectual
initiative
andproduces
confident
and (4) Toprovideattractive, innovativeconferenceand event facilities,attracting clientsboth
ambitious
graduateswhohavereached thehighest
academic standards
topreparethem nationallyand internationally
forsuccess
inlifeandtheworkplace. Conferenceand eventincomehas gone up by 13%in20X6,whichis a good increasefor
There arevariousperformance indicatorswhichcanbelooked attoascertain whetherRU RU.Ithas managed to controlits costs relatingto these eventswelltoo, sincethese have
ismeeting thisstrategicaim.First,question
1ofthesurvey shows that83%ofstudents onlyincreasedby 4%.RUhas also wonan award forits conferencefacilityand attracted a
thinkthatthecourse isintellectually
stimulatingandthequality ofteachingishigh.This numberof newclients.RUthereforeappears to be focusingwellon thisstrategicaim.
hasgonedownbythreepercentage pointssince20X5,whichisnotgood. (5) Tobe recognisedboth nationallyand internationallyfor the scope and relevanceof their
IntheNOSsurvey, thepercentage ofgraduates agreeing thatthecourse hasdeveloped research
themasa person hasincreased from80%in20X5to82%in20X6.Thiswould indicate
that Incomefromresearchat RUhas actuallygone downby 13%thisyear, as have the
RUisindeed developing confidentandambitious graduates. associated costs. Whilsta localuniversityhas wonan award fortheircontributionto
However, thenumber ofgraduates achievingfirstclassdegreesin20X6hasfallenvastly research,RUhas not been successfulinthisregard. Thesuggestionis that thisaimhas not
from28%to20%.Giventhattheentryrequirements wereonlyrelaxed in20X6,thisshould been focusedon in20X6.
nothavehadanyimpact onresults.Thisinfersthatthequality ofteachingmayhave
declinedandtheratioofstudents toacademic staffhasincreased from35:1to40:1.It
appears that,although manynewstudents wererecruited in20X6,therewerenotenough
newacademic staffrecruitedtodealwiththeinflux ofstudents.Thisisshown bythefact
thatstudent numbers increasedby13%butacademic staffcostsonlyincreasedby6%.
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q q
Overallsatisfaction (a) Tomakea profitlong-term
Inadditionto the above,it shouldbe consideredthat the overallsatisfactionpercentage for Inorderto makea profitthe longtermrevenuesneed to be higherthan the longtermcosts.
students has decreased from83%to 81%.Thiscouldhave seriousimplicationsforRUas it is the
mainperformanceindicatorused both internallyand externallyto assess howRUisperforming. Theweeklyrevenueper guest is $2,000 inthe 20X7budget, the 20X7actual resultsand the
Aswellas meaningthat RUmay wellnowattract fewerstudents, it willalso have an impacton 20X6actual resultswhichis not inlinewithinflation.Thismeans that revenuesper guest
the fees whichcan be charged to students infutureyears. Theuniversityneeds to considerhowit are fallinginreal terms.
can improvethe serviceit is providinginorderto improveoverallsatisfaction. Howeverallstaff costs have increasedby 2%whichis caused by inflation.
Calculations Overallthismeans that the profitper guest, based on the limitedfiguresavailableis falling.
%age Therepaircosts, allowingforinflationhave been set at the same levelas 20X6.Theactual
2016 2015 Increase/decrease for20X7appears to be better than budget, but as repairsare likelyto be incurredon an ad
$m $m hoc basis, thisdoes not necessarilyindicatean improvement.The20X6repaircosts are
Income higherthan the competitor’sbut it is difficultto comparebecause HammocksCo have
Tuitionfees 148 135.6 9% moreroomsso weare not comparinglikewithlike.On a repairper roombasis Hammocks
has slightlylowercost at $163per roomcomparedto the competition’s$164per room.
Researchgrants 3.5 4.5 (22%)
Conferencesand otherevents 18 16 13% Dueto the securelong-termcontracts whichHammocksCo offersits staff, staff costs are
Totalincome 169.5 156.1 9% fixedcosts inthe managementaccounts. Thismeans that inorderto be profitable,these
costs need to be coveredby the contributionper guest. Althoughthere is not the data to
calculatethe contributionper guest per week,the higherlevelof guest occupancylevelin
Expenditure 20X7(bothbudgeted and actual) is a positiveindication.Hammocks’occupancylevelper
Academicstaff costs 80.8 76.2 6% roomwas 81%comparedto the competitor’s77%(allbased on doubleoccupancy)
Administrationstaff costs 50.4 48 5% indicatingthat performanceis good.
Premises,facilitiesand technologycosts 7.6 8.4 (10%) Tocreate customerloyalty
Eventand conferencecosts 8.3 8 4%
Researchgrants 3.1 4 (23%) Thereare a numberof indicatorsto showthat HammocksCo have created a loyal
customerbase.
Sustainabilityand communityassistance 1.2 2.4 (50%)
A Firstlycomparedto theirmaincompetitorHammocksCo receivemorerevenue,charge a
Totalexpenditure 151.4 147 3% N
S
W higherpriceper guest per weekand have better occupancyrates. Thisindicatesgood
Surplus 18.1 9.1 99% E customersatisfaction.
G HG H
R
Studentnumbers 27,000 24,000 13%
S Secondlythe ratio of staff to guest is higherthan the competition;1.5comparedto 1.3in
367 Hammocks Co 20X6(actual in20X7is slightlyhigherdue to a loweroccupancyrate than budgeted and
the fact that staff numbersare fixed).Asthisis a seasonalbusinessthisis may simplybe a
blip.
Workbookreference.Performancemeasurementand the balanced scorecardare coveredin Finally,the commentson TripEventare verypositiveabout the levelof serviceand standard
Chapter 19. of cleanlinessand maintenance.Howeverit shouldbe noted that the entirecustomer
Toptips. Balancedscorecardquestionsare oftennot answeredwell- makesure you knowthe experienceis not positive.Complaintslikethe administrativeerrorsand unchangingmenus
perspectivesand understandthe differencebetweengoalsand measures.Readthe requirements couldbe a warningsignof possibleerosionof customerloyalty.
carefullyforpart (b)to makesure you givethe correctnumberof goalsand measures. (b) (i) Abalanced scorecardapproach to performancemanagementis importantto
HammocksCo because it willprovidemanagementwitha set of informationwhich
Easymarks.Thereare easy marksavailableforusingthe informationgiveninthe scenario.For
example,you shouldreferto the commentsmade on TripEventand explaintheirimplications. coversallrelevantareas of businessperformance.AtpresentHammocksCo
considersperformancefroma financialand customerperspective.These
perspectivesare importantbut they do not allowa wideenoughconsiderationof all
Markingscheme of the factors that shouldbe consideredinthisbusiness.
Introducingthe balanced scorecardwill:
Marks
Ensurethat allinternalsystemsand processessupportthe customerand financial
(a) Discussthe performanceof Hammocks 8 objectives.Forexample,indecision-makingthere is littlepointinbuyinga newIT
(b) (i) Twoadvantages of usingthe BalancedScorecard 3 systemthat does not eitherimprovecustomerexperienceor reduceprocessingcosts.
One goal, twoperformancemeasuresfor:
(ii) Internalbusinessprocesses 4.5 Encouragefullintegrationbetweenalldepartments.Errorsininvoicingor sending
specificrequirementsare systemor internalprocesserrors.Whilea customermight
(iii) Innovationand growth 4.5 not choosea holidayresortforits excellentadministration,they may refuseto use a
12 companyagain ifthey receivepoorservice.Thusneglectingone aspect of the
20 scorecardcan impacton customersatisfactionand longertermfinancial
performance.
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q
Makesureimportant
elements areassessed
andexpected performance
levels
quantified
and/orqualified.
Thismeans thatperformance
canbemeasured,
explained,
compared
andwhere necessary,
control
actioncanbetaken.Theerrors
thatoccuratHammocks Coarespoilingthecompany’sreputation,
butthereisno
evidence
thatanyactionisbeingtaken.
Note:OnlyTWOwererequired.
(ii) Internal
businessprocess
Goal:Tohaveaneffectiveandefficient
administration.
ThefeedbackonTripEventindicates
thattheonlyguestcomplaints
relate
to
administrative
issues
priortotheguestarrival
andnotoperational
issues
atthe
resort.
Infacttheactions
oftheresortstaffwiththespeedy
resolution
ofbedding
issues
andtheorganisingofa complimentarytransfer
seems
tohavediverted
trouble.
Therefore
measures needtobefocused ontheweaker
areawhichisthe
administration.
Measures:
(1) Number oftimes
thata guestrequest
isnotreceived
atresort
priortotheir
arrival/number
ofrequests
made.
Thiswillmeasure
thenumber oftimes theguestexperience
isnotseamless
frombookingtoarrival.
(2) Average numberofcorrections
tobookingduetoanadministrativeerror.
Thismeasuresinefficient
useofstafftimeandpotentially
increasedcustomer
frustration.
InnovationandLearning A
N
Goal:Tomatchleading competitor’sfacilities S
W
G
E
R
H
Thecomment onTripEvent shows thatevenloyalcustomers arenoticingthatrivals

areincludingmoreinnovative facilities
attheirresorts.Althoughthetruestrength of
Hammocks Coliesinthequality oftheservice itisimportant thatthefacilities’ S
appliancesandservice offeringsareupdated tocompare favourably withthatofits
rivals.
Measures:
(1) Number ofin-room appliances offeredbyrivalsbutnotbyHammocks Co.
Themeasure willensurethatHammocks Coconsider whatisincluded within
theguestrooms bycomparing toexternal factors.
(2) Number ofnewitems offeredonthemenu eachmonth.
Thisshouldensure thatthechefsconsider thelatesttrendsinfinediningand
donoteverappear stagnant fromthepointofviewofthecustomer.
OTQ mixed bank
368 Thecorrect answeris:Penetrationpricing

inmarket Aandpriceskimming inmarket B
Charging lowpricesinitially
togaina largemarketshareismarket penetration pricing.
Charging highpricesinordertomaximise unitprofits
ismarketskimming. Market
penetrationpricing
ismosteffectivewhendemand fortheproduct iselastic(sensitive
to
price)andmarket skimming canmaximise profitability
whendemand isinelastic
(fairly
insensitive
toprice).
Priceelasticity
ofdemand canbereduced bytryingtopersuade customers tobuy
productsforreasons otherthanprice,suchasquality ordesign
features. Advertising
and
salespromotioncanalsohavetheeffectofreducing priceelasticity.
Answers303
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q q

347 Thecorrectansweris:ROIis a relativemeasure,thereforesmallinvestmentswitha high Marks

Weakeranswersperformedothercalculationson the twodivisionsand gave somegeneral E

commentary,eventhoughthe questionasked fora discussion'usingboth ROIand RI'. $23.2m×10% (2,320) nil

Answers 263 264 PerformanceManagement(PM)

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ThetargetROIshould berevised totakeaccount ofthetheseuncontrollable allocated Convertsa FCto VC 2

Answers265 266 PerformanceManagement(PM)

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Answers 267 268 PerformanceManagement(PM)

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Thefigures demonstrate thatthisobjective wasachieved interms ofadviceandfreemeals R

Answers269 270 PerformanceManagement(PM)

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thiswillcontinueto improveas the businessgrows. R competitor'swebsite soitisessentialthatsystem downtime iskepttoanabsolute minimum

Answers 271 272 Performance

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Gross roomrevenue– BestNight's'gross' roomrevenuebased on standard roomrates has E

Answers 273 274 Performance

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sessions that are booked.

Answers275 276 PerformanceManagement(PM)

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(a) Pertarget discussed 2 Additionaltrainingcosts ($200teaching

Answers 277 278 PerformanceManagement(PM)

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Answers 279 280 PerformanceManagement(PM)

Page 300 of 479 Page 301 of 479

Answers281 282 Performance

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R Increaseinpayrollcosts 70% 15%

Answers 283 284 Performance

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Inpercentage terms,the biggestincreaseincosts whichDivisionS has sufferedis inrelationto its

Answers 285 286 Performance

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newequipment andtechnology willmeanthatthecompany willnotkeepupwith R DivisionL:

Answers287 288 Performance

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Returnon capital employed

Answers289 290 PerformanceManagement(PM)

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means a maximumpurchase priceof $7,172,500. Express:(0.4 ×0.67)+(0.32×0.76)+(0.28×0.89)=76.04%

Answers 291 292 PerformanceManagement(PM)

Page 312 of 479 Page 313 of 479

Theywanttohelpthecommunity anddisadvantaged people andgivesomething backto

Answers 293 294 Performance

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However,the bank has not quitemet its targets forhelpingsmallbusinessesand helping

Answers 295 296 PerformanceManagement(PM)

Page 316 of 479 Page 317 of 479

Answers 297 298 Performance

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Marks Aswiththe abovestrategicaim,thisone also seemsto have been a littleforgottenin20X6.

Answers299 300 PerformanceManagement(PM)

Page 320 of 479 Page 321 of 479

Answers 301 302 PerformanceManagement(PM)

Page 322 of 479 Page 323 of 479

Thecomment onTripEvent shows thatevenloyalcustomers arenoticingthatrivals

368 Thecorrect answeris:Penetrationpricing

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