riton Electronics, Inc. produced a wide range of electronic equipment, including signal sources, test equipment, communications systems, and various piece parts and subassemblies such as motors, generators, and probes.Total annual sales were in excess of $8 billion.

The company's objective was to maximize shareholder value.In some of its business areas, innovation through research and development was crucial to stay ahead of the competition.In others, price competition made tight control over costs the key success factor.

The company was organized by product line.Its 16 relatively autonomous divisions were managed as profit centers.The division managers reported to one of four Business Group managers who, in turn, reported to the company's CEO. Each Business Group was organized around a strategic theme, and divisions within each Business Group used some shared resources.

The performance evaluation and incentive plan had the following features:

1. Bonuses would be determined by the performance of the entity for which each manager was responsible.That is, division manager bonuses would be based 100 percent on division performance; Business Group manager bonuses would be based 100 percent on Business Group performance; and corporate manager bonuses would be based 100 percent on corporate performance.
2. For bonus award purposes, actual performance would be compared with targets negotiated during the annual budgeting process.
3. Each division would be given an "economic value added" target equal to budgeted operating profit minus budgeted operating assets multiplied by 12 percent, which was estimated to be Triton's weighted average cost of capital.For example, a division with an operating profit budget of $100,000 and budgeted operating assets of $500,000 would be given an economic value added (EVA) target of $100,000 - $60,000 (=$500,000*12%) = $40,000.
4. If an entity's actual economic value added were exactly equal to its target, the manager would earn a bonus equal to 50 percent of salary.Above the target, the bonus could increase up to a maximum of 150 percent of salary, while below the target it would decrease to a minimum of zero.

Exhibit 1Performance information for five of the sixteen divisions of Triton Electronics ($ in 000)

Budgeted

Actual

Division

Operating Profit

Operating Assets

Economic Value Added

Operating Profit

Operating Assets

Economic Value Added

A

$ 1,000

$ 8,000

$40

$ 1,150

$ 7,000

$ 310

B

1,000

8,000

40

4,500

7,000

3,660

C

50

1,000

(70)

300

800

204

D

(700)

4,000

(1,180)

(300)

4,200

(804)

E

600

2,000

360

100

2,000

(140)

Exhibit 2Performance information on Division E (single-product division)

Per Unit (budgeted)

Budget

Actual

Variance

Sales

$ 50

$10,000,000

$9,090,000

$910,000 U

Cost of Goods Sold

Raw Material

12

2,400,000

2,100,000

$300,000 F

Direct Labor

5

1,000,000

950,000

$50,000 F

Fixed Overhead

3,000,000

3,030,000

$30,000 U

Gross Margin

3,600,000

3,010,000

$590,000 U

Selling, Gen'l and Admin.

2,200,000

2,185,000

$15,000 F

Research & Development

800,000

725,000

$75,000 F

Operating Income

$ 600,000

$ 100,000

$500,000 U

Contribution Per Unit

$ 28

Units Sold by Division E

200,000

190,000

Total Market for Product (units)

4,000,000

3,455,000

Average Industry Selling Price

$ 50.00

$ 46.00

Units of Raw Material Used in Manufacturing

200,000

185,833

U= Unfavorable Variance, F = Favorable Variance

QUESTIONS 1-8 ON TRITON ELECTRONICS CASE

Note: Questions 1-7 refer to Division E (Exhibit 2). Recall that Division E produces a single product

Question 1: Decompose the revenue variance for Division E into price variance and quantity variance (for price variance, use the conventional formula used in class). Briefly explain how to interpret each variance - that is, clarify the sign of the variance (for example:assume price variance is +50: I want you to say something like "since price was higher than expected, revenues were higher than expected by 50...")(4 points)

Question 2: Focus on the quantity variance computed in Question 1. Decompose it in market size variance and market share variance.Again, briefly explain how to interpret each variance (4 points)

Question 3: Focus on the price variance computed in Question 1.Try to explain the reasons for this price variance. To answer this question, you can formally "decompose" this price variance using variance analysis (coming up with a formula of your own) OR you can derive similar qualitative insights using the information in the case (3 points) (tip: if you cannot come up with an answer in few minutes, move to the next question and come back to this question at the end)

Question 4: For each of the Cost of Goods Sold items separately, decompose its variance into unit cost variance and quantity variance (as usual, unit cost here means the cost for each unit of product sold, i.e. each unit of output) (6 points)

Question 5: Focus on the unit cost variance of raw materials you just computed in question 4. Try to further explain the reasons for this unit cost variance using other variance analysis formulas you learned during the course (4 points)