Question 3: Performance Measurement Systems [22 marks] Question 3.1 Luton Homes is a leading builder of luxury houses. Three years ago, Luton expanded its business by acquiring Clarity Homes, which gave Luton a significant presence in the project home market. Clarity is managed as an investment centre, and ROI is used to assess Clarity's performance (with the average of beginning and end-of-year investment balances being used in the ROI calculations). Bonuses for clarity's managers are also based in part on ROI. Investments made by Luton Homes and its Clarity Division are expected to earn a minimum required rate of return of 12% before income taxes. The results from last year's operations at Clarity is provided below. The division's productive assets were $682,500 at year end, a 5% increase over the prior year-end balance. Sales revenues Variable expenses Contribution margin Fixed expenses Net operating income $1,000,000 300,000 700,000 500,000 200,000 This year, the company has a $190,000 investment opportunity with the following cost and revenue characteristics: Sales revenues $200,000 Contribution margin ratio 60% of sales Fixed expenses $90,000 Required: Question 3.1.1 What is the likely reaction of Clarity Division's managers towards the investment opportunity? Would the CEO of Luton Homes want him to pursue the investment opportunity? Explain your answer with supporting evidence. [Word limit for later part: 100 words. Note the word count at the end of your answer] (7 marks) Your Answer (expand the space as required): Word count: Question 3.1.2 Assume that Luton Homes uses Residual Income (RI) to evaluate Clarity's performance. Will the manager of Clarity Division be likely to change its attitude towards the investment opportunity? Would using Residual Income help solving goal congruence here? Explain your answer with supporting evidence. [Word limit for later part: 100 words. Note the word count at the end of your answer] (5 marks) Your Answer (expand the space as required): Word count: Question 3.2 (Part B) Joe Evans, the Manager of McDonell Fast Food Company, is interested in developing a strategic performance management system that can help him evaluate the relative performance of each product line and provide signals of likely future performance issues. He is interested to know whether a balanced scorecard may be the way to proceed. Required: Question 3.2.1 Explain to Evans the essential features of a balanced scorecard. In your answer, explain how the organization can achieve strategic alignment using balance scorecard. [Word limit: 250 words. Note the word count at the end of your answer] (5 marks) Your Answer (expand the space as required): Word count: Question 3.2.2 Identify two appropriate performance measures for each of the balance scorecard perspectives for McDonell Fast Food Company. [Word limit: 250 words. Note the word count at the end of your answer] (5 marks) Your Answer (expand the space as required): Question 3: Performance Measurement Systems [22 marks] Question 3.1 Luton Homes is a leading builder of luxury houses. Three years ago, Luton expanded its business by acquiring Clarity Homes, which gave Luton a significant presence in the project home market. Clarity is managed as an investment centre, and ROI is used to assess Clarity's performance (with the average of beginning and end-of-year investment balances being used in the ROI calculations). Bonuses for clarity's managers are also based in part on ROI. Investments made by Luton Homes and its Clarity Division are expected to earn a minimum required rate of return of 12% before income taxes. The results from last year's operations at Clarity is provided below. The division's productive assets were $682,500 at year end, a 5% increase over the prior year-end balance. Sales revenues Variable expenses Contribution margin Fixed expenses Net operating income $1,000,000 300,000 700,000 500,000 200,000 This year, the company has a $190,000 investment opportunity with the following cost and revenue characteristics: Sales revenues $200,000 Contribution margin ratio 60% of sales Fixed expenses $90,000 Required: Question 3.1.1 What is the likely reaction of Clarity Division's managers towards the investment opportunity? Would the CEO of Luton Homes want him to pursue the investment opportunity? Explain your answer with supporting evidence. [Word limit for later part: 100 words. Note the word count at the end of your answer] (7 marks) Your Answer (expand the space as required): Word count: Question 3.1.2 Assume that Luton Homes uses Residual Income (RI) to evaluate Clarity's performance. Will the manager of Clarity Division be likely to change its attitude towards the investment opportunity? Would using Residual Income help solving goal congruence here? Explain your answer with supporting evidence. [Word limit for later part: 100 words. Note the word count at the end of your answer] (5 marks) Your Answer (expand the space as required): Word count: Question 3.2 (Part B) Joe Evans, the Manager of McDonell Fast Food Company, is interested in developing a strategic performance management system that can help him evaluate the relative performance of each product line and provide signals of likely future performance issues. He is interested to know whether a balanced scorecard may be the way to proceed. Required: Question 3.2.1 Explain to Evans the essential features of a balanced scorecard. In your answer, explain how the organization can achieve strategic alignment using balance scorecard. [Word limit: 250 words. Note the word count at the end of your answer] (5 marks) Your Answer (expand the space as required): Word count: Question 3.2.2 Identify two appropriate performance measures for each of the balance scorecard perspectives for McDonell Fast Food Company. [Word limit: 250 words. Note the word count at the end of your answer] (5 marks) Your Answer (expand the space as required)
