Question
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:
- Calculate the Return on Capital Employed (ROCE) and the Residual Income (RI) for Mars for the year end December 2019 period.
- 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:
- Controllable Profit per annum
- Residual income for years 1,2,3 and 4
- Return on Investment for years 1,2,3 and 4
- Identify one performance measure for each of the four categories of the Balanced Scorecard (BSC): Financial, Internal, Learning and Growth and Customers.
- Explain why two of the measures you identified in part c) above are appropriate for Jack.
- Discuss the nature of cause and effect in the BSC as it relates to your suggestions in part d) above.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started