Question
Assume you are the management accountant for the Foleo Group, and nine months ago you helped Tracey Chen introduce a performance measurement system across the
Assume you are the management accountant for the Foleo Group, and nine months ago you helped Tracey Chen introduce a performance measurement system across the organisation based on ROI as the sole measure. Tracey has now asked you to assist her in assessing the effectiveness of the new system since its introduction for each of the business units and H.O. Departments. To begin the process, she asks you to analyse the Foleo Accessories business - Tracey is quietly confident that performance has improved, considering the bonus payments across the business unit have been paid out each month since the system was implemented. You collect the data you need for your analysis of the performance of Foleo Accessories for the most recent quarter, compared with the same period last year, and compile it on the document below.
Foleo Accessories Comparison Performance Report: |
| ||
---|---|---|---|
| This year | Last year | |
Sales Revenue: | $530,000 | $560,000 | |
Variable Costs | $320,000 | $340,000 | |
CONTRIBUTION MARGIN OF FOLEO ACCESSORIES | $210,000 | $220,000 | |
Less: Controllable Fixed Expenses | $19,000 | $21,000 | |
PROFIT MARGIN CONTROLLABLE BY FOLEO ACCESSORIES | $191,000 | $199,000 | |
Less: Traceable Fixed Expenses | $65,000 | $61,000 | |
PROFIT MARGIN TRACEABLE TO FOLEO ACCESSORIES | $126,000 | $138,000 | |
Less: Common Fixed Expenses | $15,000 | $15,000 | |
NET PROFIT BEFORE TAX | $111,000 | $123,000 |
Extract from Foleo Accessories Balance Sheet Comparison: |
| |
---|---|---|
| This year | Last year |
Assets: |
|
|
Current Assets | $540,000 | $830,000 |
Fixed Assets | $1,400,000 | $1,700,000 |
TOTAL ASSETS | $1,940,000 | $2,530,000 |
Liabilities: |
|
|
Current Liabilities | $350,000 | $360,000 |
Long term Liabilities | $1,050,000 | $1,100,000 |
TOTAL LIABILITIES | $1,400,000 | $1,460,000 |
For the purpose of calculating ROI and RI, assume the followings: profit is defined as profit margin controllable by Foleo Accessories, invested capital is defined as total assets less current liabilities, and the current required rate of return on the Foleo Groups invested capital is 8%.
(a) Calculate the ROI for Foleo Accessories for this year and last year.
(b) Calculate the RI for Foleo Accessories for this year and last year.
(c) Are the RI measures consistent with the ROI measures in evaluating performance of Foleo Accessories between this year and last year?
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