Ch25SM - CHAPTER 25 DISCUSSION QUESTIONS 25-1 Q25-1....

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Unformatted text preview: CHAPTER 25 DISCUSSION QUESTIONS 25-1 Q25-1. Percentage of profit to sales is a measure of current operating activities. Revenue produc-tion, cost incurrence, and cost control are embodied in this ratio. The capital-employed turnover rate is a measure of the amount of asset investment relative to the activity level of the company. This rate highlights the success of achieving sales volume with minimum asset investment and measures the sales-generation activity and overall asset management. Q25-2. Capital employed consists of noncurrent assets (investments in buildings, machinery, and equipment) as well as current assets. Some firms do not include current assets but prefer working capital; that is, the net balance of current assets and current liabilities. Q25-3. Two major objectives that management may have in mind when setting up a system for measuring the return on divisional capital employed are: (a) to secure a summary measure of the profitability of operations, products, and facilities connected with each division; (b) to obtain information as to the success of division managers in conducting their por-tions of the companys activities. Q25-4. Dysfunctional actions that management could take to improve short-term return on capital employed at the expense of long-run profitability include: (a) Defer or reduce preventive maintenance, which reduces current expense but short-ens the life of assets, thereby increasing future cost. (b) Reduce expenditure on research and development, which reduces current expense but makes the company less competitive in the future. (c) Reduce or avoid employee training and development, which reduces current expense but makes the company less competitive in the future. (d) Sell and then rent needed assets, which gets them off the balance sheet but may cost the company more in the long run. (e) Defer, reduce, or avoid modernization of facilities, especially substantial invest-ments in automated manufacturing facili-ties, which keeps asset cost on the balance sheet low but makes the com-pany less competitive in the future. Q25-5. Use of the rate-of-return-on-capital-employed has the following five claimed advantages: (a) It focuses managements attention on earning the best profit possible on the capital (total assets) available. (b) It ties together the many phases of finan-cial planning, sales objectives, cost con-trol, and the profit goal. (c) It aids in detecting the strengths and weaknesses with respect to the use or nonuse of individual assets. (d) It serves as a yardstick in measuring per-formance and provides a basis for evalu-ating improvement over time and among divisions. (e) It develops a keener sense of responsi-bility and team effort in divisional man-agers by enabling them to measure and evaluate their own activities in the light of the budget and with respect to the results achieved by other divisional managers....
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Ch25SM - CHAPTER 25 DISCUSSION QUESTIONS 25-1 Q25-1....

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