FOLEO FONES CASE STUDY - Chapter 7:

Assume you are the management accountant for the Foleo Group, and nine months ago you helped Tracey Chen introduce a performance measurement system across the organisation based on ROI as the sole measure.Tracey has now asked you to assist her in assessing the effectiveness of the new system since its introduction for each of the business units and H.O. Departments.To begin the process, she asks you to analyse the Foleo Accessories business - Tracey is quietly confident that performance has improved, considering the bonus payments across the business unit have been paid out each month since the system was implemented.You collect the data you need for your analysis of the performance of Foleo Accessories for the last nine months, compared with the same period last year, and compile it on the document below.

Foleo Accessories Comparison Performance Report for 9 months:

Last 9 months

Same period last year

Sales Revenue:

$1,609,875

$1,685,818

Variable Costs

$998,123

$1,005,823

CONTRIBUTION MARGIN OF FOLEO ACCESSORIES

$611,752

$679,995

Less:Controllable Fixed Expenses

$62,785

$62,412

PROFIT MARGIN CONTROLLABLE BY FOLEO ACCESSORIES

$548,967

$617,583

Less:Traceable Fixed Expenses

$217,333

$216,570

PROFIT MARGIN TRACEABLE TO FOLEO ACCESSORIES

$331,634

$401,013

Less:Common Fixed Expenses

$45,000

$45,000

NET PROFIT BEFORE TAX

$286,634

$356,013

Extract from Foleo Accessories Balance Sheet Comparison:

Current

Same period last year

Assets:

Current Assets

$1,672,145

$2,505,129

Fixed Assets

$4,277,208

$5,132,650

TOTAL ASSETS

$5,949,353

$7,637,779

Liabilities:

Current Liabilities

$1,070,674

$1,071,384

Long term Liabilities

$3,150,000

$3,300,000

TOTAL LIABILITIES

$4,220,674

$4,371,384

(a) From the data you have collected, and knowing that Foleo uses total assets less current liabilities to calculate the Invested Capital component for ROI, calculate the ROIs for current period and for the same period last year for Foleo Accessories.

(HINT:Use the profit controllable by Foleo Accessories for your calculations as you are evaluating the business unit.Show all your workings to maximise your marks.) (1.2 marks)

____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

(b) From your analysis above, prepare a brief report for Tracey Chen explaining the ROI results in relation to the Performance Report and Balance Sheet extract, and recommending a course of action.

(HINT:Explain why the ROI results are/are not consistent with the business unit's current and past performance in generating profits.Ensure you provide a recommendation.) (0.5 mark)

____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

(c) After reading your report, Tracey is concerned and has asked you to calculate the Residual Income measure for both time periods to see if it more clearly reflects the performance of Foleo Accessories.She advises you that the current required rate of return on the Foleo Group's invested capital is 9.2%.

(HINT:Use the same definitions for profit and invested capital as you did in part (a), and show all your workings to maximise your marks.) (1.2 marks)

____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

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

______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

(e) Unhappy with the results of your analysis, Tracey finally asks you to calculate the EVA for each time period.Knowing you will need additional information, she provides the below financial data relating to Foleo Group Limited.

(HINT:You will need to calculate the WACCs for each time period before you can determine the EVAs, as interest rates have fluctuated.Show all your workings to maximise your marks.) (1.6 marks)

Current

Same period last year

After-taxcost of debt capital

4.40%

3.25%

Market value of debt

$4,178,467

$4,152,815

Cost of equity capital

4.00%

4.30%

Market value of equity

$950,774

$2,939,755

Tax rate

30%

30%

____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

__________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

(f) Are these EVA measures consistent with the measures you calculated earlier?Why or why not?

(HINT:Ensure you refer to your analysis in your explanation.) (0.3 mark)

______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________