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In: Accounting

Pyramid Printing Company’s Controller, Sally Sound, is contemplating the restructuring of a management incentive program. Currently,...

Pyramid Printing Company’s Controller, Sally Sound, is contemplating the restructuring of a management incentive program. Currently, managers are compensated based on achieving levels of operating income. However, recent implementations of JIT and new investments have resulted in improved performance.

Consider the calculations of Return on Investment, Residual Income, Economic Value Added, and Return on Sales. Which do you believe to be a superior method of measuring performance, and why? Select the measure which you believe would be appropriate for Pyramid and justify your selection.

Solutions

Expert Solution

Economic Value Added is a value based performance measure that gives importance on value creation by the management for the owners. Profit maximization as a concept is age-old, wealth maximization is matured and value maximization is today’s wisdom.

The other calculations such as Return on investment (which tells about the return that we recieve in the investment made ), Residual income ( will be computed by reducing the value of the equity from the net income of the company) and Return on sales(which describes the percentage of profits on sales ) will be much good for profit maximisation and for investments.

Hence i believe that the EVA is superior performance measure than the others.

In our present scenario, profit maximisation is important however for welath of the company if we give more priority then company would see better results.

Hence for the company we recommend EVA for the performance measure.

ekkarill92 answered 1 year ago
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