This model consists of a margin subcomponent

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Unformatted text preview: odel, and is pictured at right. This model consists of a margin subcomponent (Operating Income/Sales) and a turnover subcomponent (Sales/Average Assets). These two subcomponents can be multiplied to arrive at the ROI. Thus, ROI = (Operating Income/ Sales) X (Sales/Average Assets). A bit of algebra reveals that ROI reduces to a much simpler formula: Operating Income/ Average Assets. But, a prudent manager who is to be evaluated under the ROI model will quickly realize that the subcomponents are important. Notice that ROI can be increased by any of the following actions: increasing sales, reducing expenses, and/or decreasing the deployed assets. The DuPont approach encourages managers to focus on increasing sales, while controlling costs and being mindful of the amount invested in productive assets. A disadvantage of the ROI approach is that some “profitable” opportunities may be passed by managers because they fear potential dilution of existing successful endeavors. The consulting firm of Stern, Stewart & Co. has trademarked and popularized the Economic Value Added model as an alternative comprehensive evaluative tool for assessing investment returns. Presumably, it compensates for the deficiencies of simpler models. Advanced managerial accounting courses typically devote considerable coverage to the various approaches to evaluating investment centers. Download free ebooks at 9 Responsibility Accounting and Management by Exception Tools for Enterprise Performance Evaluation 1.6 Affixing Responsibility Lower-level managers may only be responsible/accountable for a small subset of business activities. As one moves up the organizational chart, mid and upper-level managers assume ever greater degrees of responsibility. The reporting system should mimic the expanded scope, and develop information which reveals the performance for all units within the control of a particular manager. At successively higher steps, individual performance reports are combined to reveal the success or failure of all activities beneath a particular manager. This can result in one manager being held accountable for a combination of cost, profit, and investment centers. A keen manager must be familiar with the specific techniques for managing and gauging the success of each! Following is an organization chart for Out To Lunch Hamburgers. Out to Lunch is a rapidly growing fast-food restaurant chain. Their business model revolves around a uniquely flavored hamburger, and a very simple menu consisting of a hamburger, fries, and drinks. They provide simple “round number” pricing, few products, and rapid service. Out to Lunch also has a catering service for sporting events, corporate outings, and similar occasions. The block colors in the organization chart indicate the character of performance/responsibility evaluation that is germane to each position. The Chief Executive Officer reports to the owners, and the owners are primarily interested in their return on investment. Three vice presidents report to the CEO: The VP of operations is responsible • for the overall investment in operations, which is driven...
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This note was uploaded on 06/07/2013 for the course BA 201 taught by Professor Cuongvu during the Fall '13 term at RMIT Vietnam.

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