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    Roi Theories

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    RATHER ASIF
    The document describes four different types of responsibility centers within a company: cost center, revenue center, profit center, and investment center. It then provides examples of managers from different companies that exemplify each type of center. The plant manager is focused only on costs as a cost center. The marketing VP is focused only on revenues as a revenue center. The sales manager and factory manager are focused on both revenues and costs as a profit center. The new division manager is focused on revenues, costs, and investments as an investment center.

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    Roi Theories

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    RATHER ASIF
    41 views2 pages
    The document describes four different types of responsibility centers within a company: cost center, revenue center, profit center, and investment center. It then provides examples of managers from different companies that exemplify each type of center. The plant manager is focused only on costs as a cost center. The marketing VP is focused only on revenues as a revenue center. The sales manager and factory manager are focused on both revenues and costs as a profit center. The new division manager is focused on revenues, costs, and investments as an investment center.

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    The document describes four different types of responsibility centers within a company: cost center, revenue center, profit center, and investment center. It then provides examples of managers from different companies that exemplify each type of center. The plant manager is focused only on costs as a cost center. The marketing VP is focused only on revenues as a revenue center. The sales manager and factory manager are focused on both revenues and costs as a profit center. The new division manager is focused on revenues, costs, and investments as an investment center.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    41 views2 pages

    Roi Theories

    Uploaded by

    RATHER ASIF
    The document describes four different types of responsibility centers within a company: cost center, revenue center, profit center, and investment center. It then provides examples of managers from different companies that exemplify each type of center. The plant manager is focused only on costs as a cost center. The marketing VP is focused only on revenues as a revenue center. The sales manager and factory manager are focused on both revenues and costs as a profit center. The new division manager is focused on revenues, costs, and investments as an investment center.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 2

    1.Terrin Belson, plant manager for the laser printer factory of Compugear Inc.

    , brushed his hair back and


    sighed. December had been a bad month. Two machines had broken down, and some factory
    productionworkers (all on salary) were idled for part of the month. Materials prices increased, and
    insurancepremiums on the factory increased. No way out of it; costs were going up. He hoped that the
    marketingvice president would be able to push through some price increases, but that really wasn't his
    department.
    Cost center
    2.Joanna Pauly was delighted to see that her ROI figures had increased for the third straight year. She
    wassure that her campaign to lower costs and use machinery more efficiently (enabling her factories to
    sellseveral older machines) was the reason why. Joanna planned to take full credit for the improvements at
    hersemiannual performance review.
    Investment center
    3.Gil Rodriguez, sales manager for ComputerWorks, was not pleased with a memo from
    headquartersdetailing the recent cost increases for the laser printer line. Headquarters suggested raising
    prices."Great," thought Gil, "an increase in price will kill sales and revenue will go down. Why can't the
    plantshape up and cut costs like every other company in America is doing? Why turn this into my
    problem?
    "Revenue center
    4.Susan Whitehorse looked at the quarterly profit and loss statement with disgust. Revenue was down,
    andcost was up—what a combination! Then she had an idea. If she cut back on maintenance of equipment
    andlet a product engineer go, expenses would decrease—perhaps enough to reverse the trend in income.
    Profit center
    5.Shonna Lowry had just been hired to improve the fortunes of the Southern Division of ABC Inc. She
    metwith top staff and hammered out a 3-year plan to improve the situation. A centerpiece of the plan is
    theretiring of obsolete equipment and the purchasing of state of-the-art, computer-assisted machinery.
    Thenew machinery would take time for the workers to learn to use, but once thatwas done, waste wouldbe
    virtually eliminated.
    Investment center

    There are four responsibility centers; cost center (manager responsible only for costs), revenue center
    (manager responsible only for revenue), profit center(manager responsible for both revenues and costs)
    and investment center (manager responsible for revenues, costs, and investments).

    Margin, Turnover, Return on Investment, Average Operating Assets Elway Company provided the
    following income statement for the last year:

    Sales $1,040,000,000

    Less: Variable expenses 700,250,000

    Contribution margin $ 339,750,000

    Less: Fixed expenses 183,750,000

    operating income $ 156,000,000

    At the beginning of last year, Elway had $28,300,000 in operating assets. At the end of the year, Elway
    had$23,700,000 in operating assets

    Required:1.Compute average operating assets.$26,000,000


    2.Compute the margin (as a percent) and turnover ratios for last year

    Margin 15%

    Turnover 40

    3-compute ROI as a percent.

    600%

    4-ROI measures a company’s ability to generate income relative to its investment in assets. The greater
    the ROI, the more efficiently the company is generating from its assets.

    5. CONCEPTUAL CONNECTION Comment on why the ROI for Elway Company is relatively high (as
    compared to the lower ROI of a typical manufacturing company).1.Elway Company might be a service
    organization with relatively few physical assets required to generate its sales revenue and income. ROI
    will be higher when the factors that create a company’s sales or income are not formally recognized as
    assets (e.g. human talent)

    1. Average Operating Assets = (Beginning Assets + Ending Assets)/2

    2. Margin = Operating Income/ Sales

    Turnover = Sales/Average Operating Assets

    3.ROI =

    MarginTurnover Operating Income/SalesXSales/Avg. Operating Asset

    The Avila Division of Maldonado Company had operating income last year of $136,400 and avg.
    operating assets of 1,900,000. Malonado’s minimum acceptable rate of return is 9%.

    Required:1.Calculate the residual income for the Avila Division.a.Residual income = operating income -
    (minimum rate of return X avg operating assets)b.=136,400 - (.09 X $1,900,000)c.= - $34,600

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