PERFORMANCE MEASUREMENT AND COMPENSATION

Theoretical concepts to consider:

Six steps of designing an accounting-based performance system

Goal congruence

Practical questions:

Question 1

Mountain Ltd provides the following data:

Division A

Division B

Revenue

$1,750,000

$5,500,000

Net profit (Income)

$200,000

$900,000

Investment

$1,500,000

$4,000,000

The company's required rate of return is 12%.

Required:

a)Calculate return on sales [= income / revenue]

b)What does (a) tell us?

c)Calculate investment turnover [= revenue / investment]

d)What does (c) tell us?

e)Calculate return on investment [= income / investment OR (a) x (b)]

f)What does (e) tell us?

g)Calculate Residual income [= income - (required rate of return x investment]

h)What does (g) tell us?