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Chapter 23 Solutions


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CHAPTER 23 PERFORMANCE MEASUREMENT, COMPENSATION, AND MULTINATIONAL CONSIDERATIONS 23-1 Examples of financial and nonfinancial measures of performance are: Financial: ROI, residual income, economic value added, and return on sales. Nonfinancial: Customer perspective: Market share, customer satisfaction. Internal-business-processes perspective: Manufacturing lead time, yield, on-time performance, number of new product launches, and number of new patents filed. Learning-and-growth perspective: employee satisfaction, information- system availability. 23-2 The six steps in designing an accounting-based performance measure are: 1. Choose performance measures that align with top management’s financial goals 2. Choose the time horizon of each performance measure in Step 1 3. Choose a definition of the components in each performance measure in Step 1 4. Choose a measurement alternative for each performance measure in Step 1 5. Choose a target level of performance 6. Choose the timing of feedback 23-3 The DuPont method highlights that ROI is increased by any action that increases return on sales or investment turnover. ROI increases with: 1. increases in revenues, 2. decreases in costs, or 3. decreases in investments, while holding the other two factors constant. 23-4 Yes. Residual income (RI) is not identical to return on investment (ROI). ROI is a percentage with investment as the denominator of the computation. RI is an absolute monetary amount which includes an imputed interest charge based on investment. 23-5 Economic value added (EVA) is a specific type of residual income measure that is calculated as follows: Economic value added (EVA) = After-tax operating income ( 29 Total assets minus Weighted-average cost of capital current liabilities × 23-6 Definitions of investment used in practice when computing ROI are: 1. Total assets available 2. Total assets employed 3. Total assets employed minus current liabilities 4. Stockholders’ equity 23-1
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23-7 Current cost is the cost of purchasing an asset today identical to the one currently held if an identical asset can currently be purchased; it is the cost of purchasing an asset that provides services like the one currently held if an identical asset cannot be purchased. Historical-cost- based measures of ROI compute the asset base as the original purchase cost of an asset minus any accumulated depreciation. Some commentators argue that current cost is oriented to current prices, while historical cost is past-oriented. 23-8 Special problems arise when evaluating the performance of divisions in multinational companies because a. The economic, legal, political, social, and cultural environments differ significantly across countries. b. Governments in some countries may impose controls and limit selling prices of products.
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