Question

Eugene and Jamie are the owners of four wellness centers under the corporate name, Wellness for You. About two years ago, Jamie retired from active management of the business. At that time, Eugene, took over the role of CEO reporting to the board of directors. Eugene delegates day to day operations to two managers who report directly to him, Olivia and Gary. Olivia, who has been with the company since almost the beginning, is responsible for both the Wrentham and Granby locations. To help her with her work load, Olivia has an assistant, Tim, who does a lot of the day-to-day work for the Wrentham location. Tim does not have anyone working for him. The other manager, Gary, is responsible for the Austin and Sugarland locations. All four locations have a number of employees.

Currently, the managers are paid a bonus based on profit. At this point, Eugene is thinking about changing the way the bonuses are computed by basing them on ROI or residual income instead of profit. To aid him in this analysis he asked his accountant to summarize key financial results from the prior year as shown below:

	Wrentham	Austin	Sugarland	Granby
Revenue	$800,000	$1,200,000	$800,000	$600,000
Net operating income	$24,000	$48,000	$36,000	$21,000
Average operating assets	$400,000	$400,000	$400,000	$200,000
Stockholders’ equity	$340,000	$340,000	$340,000	$170,000
Residual income (loss)	($16,000)	?	?	?
Margin	?	?	?	?
Turnover	?	?	?	?

Required: Answer each of the following questions associated with the information provided for Mini-Case One. In answering the numerical questions round your final answer to at least two decimal points. For example, a margin of 10.4115% would be 10.41%. A turnover of 3.3621 would be 3.36.

Wrentham Margin is __________________________

Wrentham Turnover is _______________________-

Austin Margin is __________________________

Austin Turnover is _______________________-

Sugarland Margin is _______________________-

Sugarland Residual Income is _________________

Granby Margin is __________________________

Granby Turnover is _______________________

Eugene is both an agent and principal True False

Olivia is both an agent and principal: True False

Gary is both an agent and principal True False

Tim is both an agent and principal True False

One disadvantage of Residual Income over ROI is that using Residual Income for performance evaluation may discourage investments that are lower than the current location ROI. True False

Based on the current compensation scheme, how would you classify the locations in terms of type of decentralized unit?

Cost   b. Profit c. Investment d. not enough information to determine.

If the proposed change is implemented and all the location managers are evaluated on ROI, how would you classify the locations in terms of type of decentralized unit?

Cost   b. Profit c. Investment d. not enough information to determine.

If the proposed change is implemented and all the location managers are evaluated on Residual Income, how would you classify the locations in terms of type of decentralized unit?

Cost   b. Profit c. Investment d. not enough information to determine.

You have been hired as a consultant to help management determine how to implement an Activity Based Costing System. A recent review of business shows the current cost system does not accurately reflect actual costs. Management has determined that a new cost system is critical in order to have the information needed for future decision making. For each of the following Identify the type of activity level referred to in each scenario.

1.. Preparing a corporate advertising campaign is an example of what type of activity?

Unit   b. Batch   c. Product   d. Customer e. Organizational

2. Resigning the materials to support a new line of business is an example of what type of activity?

Unit   b. Batch   c. Product   d. Customer e. Organizational

3. Making a sale call on a customer is an example of what type of activity?

Unit   b. Batch   c. Product   d. Customer e. Organizational

4. The company routinely presents workshops to potential customers. These workshops include either lunch or dinner. Part of this effort involves creating a unique menu and unique list of drinks based on the customer’s preferences. This is an example of what type of activity?

Unit   b. Batch   c. Product   d. Customer e. Organizational

Answer 1

1. Wrentham margin is her net income of $24000.
2. Wrentham turnover is $her revenue of $800,000.
3. Austin margin is his net operating income of $48000.
4. Austin turnover is his revenue of $1,200,000.
5. Sugarland margin is her net operating income of $36,000.
6. Sugarland residual income is {(48000-24000) -16000} = $8000.
7. Granby margin is her operating income of $21,000.
8. Granby turnover is $600,000.

No, Eugene is only a principle as he is the owner. Though he is also the CEO but he delegate the work to Olivia and Gary and does not work himself. Thus, it is false.

No, Olivia is only an agent as she reports to Eugene, and not an owner. Hence she is only an agent.   Thus, it is false.

No, Gary is an agent only as he reports to Eugene and not an owner. Thus, it is false.

Tim is again only an agent and not an owner hence, this is also false.

No, use of residual income will not discourage investment in other location even if the income is lower than the current ROI. Hence, the statement is false.

Investment decentralized units as the investments are almost similar in all the four units. Thus, the correct option is option b.

If the units would have been assessed on the basis of ROI then the units would have been classified as profit units.

If the units would have been assessed on the basis of residual income then the units would have been classified as profit units.

1. Corporate advertising preparation campaign is customer activity.
2. Resigning the materials to support a new line of business organizational activity.
3. Making a sale call on a customer is a customer activity.

4. It is an organizational activity as it is a routine activity.