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The following data is taken from the records of Haze, Inc. for the year 2019: Required:...

The following data is taken from the records of Haze, Inc. for the year 2019:
Required:

Sales $3,000,000

Operating expenses $2,000,000

Average operating assets $8,000,000

Minimum required rate of return 15%

a.DetermineHaze’sreturnoninvestment(ROI)andresidualincome(RI)fortheyear2019 and comment on the company’s performance.

b. Which measure (ROI or RI) would you choose for the company to use? Justify your answer.

c. The management of Haze has heard of another performance measurement called balanced scorecard (BSC), but they are still unfamiliar with it. If you were asked to clarify BSC to the management, how would you explain it?

Solutions

Expert Solution

a)
Sales $ 3,000,000.00
Less: Operating Expenses $ 2,000,000.00
Net Operating Income(a) $ 1,000,000.00

Average operating assets (b)

 $ 8,000,000.00
ROI = Net operating income/ Average operating assets= (a/b) 12.50%

Average operating assets  

 $ 8,000,000.00
Minimum rate of return 15%
Minimum required income $ 1,200,000.00
Net operating income $ 1,000,000.00
Residual Income $    200,000.00
The company's performance is not good because its ROI is lesser than the minimum required return.
b)
ROI measures performance in relative terms while residual income measures investment return in absolute dollars. Both should be used to evalute performance.
c)
Balanced scorecard is used to measure performance and strategy implementation.It  is a set of financial and non-financial measures regarding a company’s success factors, from four interrelated perspectives: financial, customer, internal business processes, and learning and growth.

ekkarill92 answered 2 years ago
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