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ABC manufactures door frames which it supplies mostly to house builders. The board of Jack is thinking of implementing a Balanced Scorecard (BSC) to help

ABC manufactures door frames which it supplies mostly to house builders. The board of Jack is thinking of implementing a Balanced Scorecard (BSC) to help it manage its strategic performance. Detailed below are the financial performance measures currently used and the Board are looking for your help in the calculation of Residual Income (RI) and Return on Capital Employed (ROCE).

Y/E 31/12/2019

Y/E 31/12/2018

$000

$000

Revenue

510

543

Cost of sales

320

300

Gross profit

190

243

Other operating costs

99

90

Operating profit

91

153

Finance cost

26

20

Profit before tax

65

133

Tax

11

27

Profit after tax

54

106

Non-current assets

640

530

Current assets

380

325

Current liabilities

45

32

Non-current liabilities

190

100

WACC

9%

9%

Jack is also considering an investment to enhance production. This investment will shorten production time and reduce costs by the use of digital technology. The investment will have a useful life of four years, after which it will have a scrap value of $0. The financial details on this investment are listed below:

Investment:

Initial cost $86.4 million

Net cash inflow $30 million per annum

Cost of capital 9%

Depreciation policy Straight line

For information:

ROI is calculated using controllable profit. Controllable profit is calculated as net cash flows less depreciation.

For future planning purposes, ROI and Residual Income (RI) are calculated using the opening written down value of plant and licence assets in each year.

The Net Present Value (NPV) for the investment is positive.

Required:

  1. Calculate the Return on Capital Employed (ROCE) and the Residual Income (RI) for Mars for the year end December 2019 period.
  1. Prepare a summary schedule for the proposed investment for each of the four years ending 31st December 2020 to 31st December 2023 which shows the estimated value of:
    1. Controllable Profit per annum
    2. Residual income for years 1,2,3 and 4
    3. Return on Investment for years 1,2,3 and 4

  1. Identify one performance measure for each of the four categories of the Balanced Scorecard (BSC): Financial, Internal, Learning and Growth and Customers.

  1. Explain why two of the measures you identified in part c) above are appropriate for Jack.

  1. Discuss the nature of cause and effect in the BSC as it relates to your suggestions in part d) above.

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