Question 3: Performance Measurement Systems

Quitlon 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. Clarityr is managed as an investment centre, and ROI is used to assess Claritv's performance (with the average of beginning and end-of-vear 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 $1.000,000 Variable expenses 300,000 Contribution margin 700,000 Fixed expenses 500,000 Net operating income 200,000 This vear. 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