Managerial Accounting Final Exam
This exam is open book, open notes. You may refer to any written material (such as the textbook, cases, readings, the slides from class, or other reference material) as you prepare your answers. You may NOT receive assistance in any form from anyone else.
Instructions
1. Please prepare and submit your answers in a single document. The simplest way to do this is to prepare your answers on this Word document, with all calculations clearly labeled. Alternatively, you may prepare and submit a separate document with all answers organized by question and part number and with all calculations clearly labeled. You may use Excel to do your calculations, but please submit your solutions in a format that can be easily printed out and graded in hard copy form (i.e. a PDF document, Word file or Excel file formatted for printing).
3. Put your name on the exam and in the file name.
Good luck on the exam!
Qin Motor Oils (26 points)
Qin Motor Oils is a Chinese multinational firm that specializes in the production of premium motor oils used in vehicles. In 2017, the firm made a strategic decision to expand into emerging markets under a new division called EMEA - a shorthand designation for Europe, Middle East and Africa. Each market or country unit is lead by a general manager from that country and reports to the Vice President of the EMEA division. Operating results for the division and demographic information about the markets in 2019 are as follows:
Income Statement For 2019 ($ 000)
South Africa
Egypt
Kenya
Revenue
$18,000
$9,500
$2,500
Cost of sales
8,650
4,200
1,100
Allocated corporate overhead
432
228
60
Local advertising
5,100
2,955
960
Other general and admin
868
437
350
Operating income
$2,950
$1,680
$30
Tax expense
885
504
9
Net Income
$2,065
$1,176
$21
Other country information:
Number of vehicles (millions)
XXXXXXXXXX
XXXXXXXXXX90
XXXXXXXXXX
GDP per capita (in U.S. dollars)
7346
3008
1237
Simon Chen, the incoming EMEA VP, is faced with a number of challenges not least of which is determining how to reward performance for country managers in his division for last year. Generally, Qin Motors measures performance based on profit or ROI (the company calculates ROI as operating income divided by total assets at the beginning of the period) but for new markets, the division manager can be given leeway to use a different system to allocate bonuses.
Balance Sheet as of the end of the year ($'000)
South Africa
Egypt
Kenya
2018
2019
2018
2019
2018
2019
Assets
Cash
$750
900
$500
510
$320
300
Accounts Receivable
1,600
1,800
450
600
500
640
Inventory
1,350
1,300
500
900
320
490
Total Cu
ent Assets
$3,700
$4,000
$1,450
$2,010
$1,140
$1,430
PPE (net)
3,500
3,400
2,550
2,402
740
810
Total Assets
$7,200
$7,400
$4,000
$4,412
$1,880
$2,240
Equities
Accounts Payable (non-interest bearing)
$575
$620
$250
$315
$190
$380
Other cu
ent liabilities (non-interest bearing)
680
720
454
450
560
709
Total cu
ent liabilities
$1,255
$1,340
$704
$765
$750
$1,089
Long-term debt
0
0
0
0
0
0
Total Liabilities
$1,255
$1,340
$704
$765
$750
$1,089
Common stock
745
745
496
496
450
450
Retained Earnings
5,200
5,315
2,800
3,151
680
701
Total Shareholders’ Equity
5945
6060
3296
3647
1130
1151
Total Equities
$7,200
$7,400
$4,000
$4,412
$1,880
$2,240
The Egypt country manager is exploring a joint venture agreement with a chain of gas stations that could potentially increase the sales of their products in country but would require an additional investment in net assets of $1,500,000. The incremental results from the joint venture per year are expected to be:
Sales $900,000
Operating Expenses 650,000
Operating Income Before Taxes 250,000
Required:
1.) Rank the three country managers based on total dollars of net income generated in XXXXXXXXXXpoint)
2.) Compute the 2019 Return on Investment for the three country managers and then rank them using their 2019 ROI (3 points)
3.) Compute the ROI for the Egyptian country unit if they go through with the joint venture in 2020 – assume revenue, costs and total assets in 2020 will be the same as used in the 2019 calculation but add in the predicted effects of the joint venture (2 points)
4.) Assuming the Egyptian manager is evaluated based on ROI, would the manager have an incentive to go through with the acquisition? Why or why not? (2 points)
Simon hires a compensation consultant who advises him to consider using Economic Value Added (EVA) for performance evaluation. This measure is calculated by deducting a capital charge from adjusted NOPAT. The company, by corporate policy, uses a 20% weighted average cost of capital for investment decisions and a tax rate of 30%.
The consultant recommends adjusting the profit for advertising expenses which according to a study in the United States have an expected life of about three years. For EVA purposes, the company will adjust operating profit by capitalizing and amortizing advertising costs on a straight-line basis over 3 years, beginning in the year of the expenditure. Jane Papergood, the division controller, has extracted the following history of advertising expenses:
Historical Advertising Expenses
South Africa
Egypt
Kenya
Total
2018
5100
2502
600
8202
2017
4200
2400
549
7149
2016
4500
2700
570
7770
5.) Calculate the 2019 EVAs and then rank the three country units based on your calculated EVA (12 points)
6. Comment on the differences in your rankings based on earnings, ROI, and EVA and explain to Mr. Chen, which country manager performed best. Be sure to highlight the trade-offs between the different measures in your comment (6 points)
Performance Measures in the Balanced Scorecard (16 points)
Balanced Scorecards typically include multiple measures in a variety of areas. One of the challenges in developing an effective Balanced Scorecard is to come up with measures that create the proper incentives. Unfortunately, actions that can be taken to improve some measures may actually create unintended behaviors that harm the organization.
For each of the following situations, describe actions that employees might take that would improve the metric on which they are measured (underlined in the question) yet would not lead to the intended improvement in the organization’s performance.
1. In order to address customer questions and complaints, customer service representatives answer calls on customer service hotlines. Concerned with minimizing the length of time that customers have to wait on the phone to speak with a representative, top management of a consumer electronics company introduces a new performance measure: length of customer service call, defined as the average number of minutes spent on a phone call with customers who call the customer service hotline. The customer service department is given responsibility for this performance measure. (4 points)
2. The vice president of marketing at a major recording label has been under pressure to promote the music artists who have recently signed recording contracts with the label. The CEO wants to increase media coverage of its new artists, who typically have never recorded an album with a major label and are considered newcomers to the music industry in general. The CEO believes that increased media coverage will generate more “buzz” for the new artists and ultimately more album sales. To ensure that this happens, the marketing department is held responsible for increasing the number of media mentions of each new artist, defined as the number of references to the artist in news articles on television, the internet, radio, or print. (4 points)
3. A manufacturing company has been plagued by the chronic failure to ship orders to customers by the promised date. To solve this problem, the production manager has been given the responsibility of increasing the percentage of orders shipped on time. When a customer calls in an order, the production manager and the customer agree to a delivery date. If the order is not completed by that date, it is counted as a late shipment. (4 points)
4. Concerned with the productivity of employees, the board of directors of a large multinational corporation has dictated that the manager of each subsidiary will be held responsible for increasing the revenue per employee of his or her subsidiary. (4 points)
He
ivore Botanicals (33 points)
Seattle-based He
ivore Botanicals manufactures a wide range of non-toxic, high quality skin care products. The company’s bestselling product is Blue Tansy, a facial mask used to rejuvenate acne-prone skin. Blue Tansy is packaged in three sizes – eight ounces, one pound and three pounds and all sizes are normally sold for $21 per pound.
He
ivore Botanicals uses a standard-costing system to set attainable standards for direct materials, labor, and overhead costs. Management reviews and revises standards annually, as necessary. Product managers, whose evaluations and bonuses are affected by their Product’s performance, are held responsible for variances in their performance reports. Cu
ent standard cost of Blue Tansy, based on normal monthly production of 8,000 pounds is as follows:
Cost Item
Quantity
Standard Cost
Total Cost
Direct materials
Cream base
9.0 oz.
$ XXXXXXXXXX/oz.
$ XXXXXXXXXX
Moisturize
6.5 oz.
$ XXXXXXXXXX/oz.
$ XXXXXXXXXX
Fragrance
0.5 oz.
$ XXXXXXXXXX/oz.
$ XXXXXXXXXX
Direct labo
Mixing
.1 hours
$ XXXXXXXXXX / hou
$ XXXXXXXXXX
Compounding
.4 hours
$