Youngblood International has its head office in New York and operates throughout America and Aisa. There are
Question:
Youngblood International has its head office in New York and operates throughout America and Aisa. There are three main division: Brewing division-this is the oldest division, and it operates major breweries in New York and Boston. Newspaper division-owns leading tabloid newspaper in several cities. Cable television division-operates cable television services in Asia and America. This is a high-risk, growing market. Each division is headed by a managing director, who has been given a high level of decision-making authority. Each managing director effectively runs his or her division as a stand-alone business within the general policy guidelines provided by the board of directors in the head office. Each managing director agrees to achieve a series of targets: return of investment(ROI), market share and sales growth. These target are developed each year as part of the annual budget-setting process. Intense lobbying takes place between each managing director and the board of directors to determine the most suitable targets. Each managing director receives an annual cash bonus based on achieving the target divisional ROI. The company defines ROI as operating profit before interest and tax(EBIT), divided by divisional average operating assets(measured at original cost less accumulated depreciation). Senior managers are each eligible for a cash bonus of $60,000 if they reach their divisional ROI target. If performance is above target, share options are awarded at the rate of 10 000 shares for every additional point over target. Thus, if the ROI target is 13% and the division achieves 15%, the manager would be awarded 20 000 share options. These options are at the prevailing market price on the last day of the financial year, and must be taken up within 2 years of the award. During the past year, the market price of the company’s shares increased from $4 to $6. If the ROI target is not reached, there are no bonuses or share options, and the managing director has to provide convincing reasons for the poor performance. As a consequence of the performance measurement and reward system, the managing directors are highly motivated to achieve, and exceed, their ROI target. Janice Cookson has just been appointed as the new management accountant in the head office, charged with redesigning the performance measurement system. As her first task, she has obtained the financial data for the last year and the latest forecast for the current year, for each division, in thousands of dollars, as follows: Operating profitSales revenueDivisional average operating assetTarget ROI Last yearCurrent yearLast yearCurrent yearLast yearCurrent yearLast yearCurrent year Newspaper$440$539$2 588$2 600$4 400$4 90010%10% Brewing9501 1004 7504 5005 0006 47118%16% Cable TV2003501 8008506 6607 0002%3% Leonard Smith, the managing director of the brewing division, is concerned that his market share, and hence his ROI, is likely to suffer next year, as his main competitor has recently purchased new brewing technology. While his own brewing equipment is 10 years old, it is unable to produce the new varieties of beer that customers are demanding and maintenance and operating costs are increasing. Smith is considering a proposal to invest $10 million in new equipment. This will probably increase next year’s operating profit for his division by $1 million. Smith has analyzed the future cash flows of this proposal, and the new acquisition will easily satisfy the minimum required rate of return of 10% for all new investments that is set for the Youngblood group. Without this acquisition, Smith expects his divisional ROI to drop to 14% next year. Suppose you are an assistant of Janice Cookson. She asked you to prepare a report on the current financial performance of the three divisions and the introduction of non-financial performance measures. In your report,
you should answer the following questions:
(1)Calculate the ROI for each division for last year and the current year, as well as the two components of ROI: margin and return. Comment on the relative performance of the three division.
(2)Calculate the bonus that each managing director would earn in the two years.
(3)Explain why Leonard Smith is reluctant to invest in the new brewing equipment. Provide calculations to back up your answer. Your calculations could include any assumptions if they are needed.
(4)Janice Cookson is considering expanding the divisional targets to include a range of non-financial measures. She is interested in developing a scorecard for each division. For each of the three divisions:
a Formulate a strategy and then the objectives for each of the four perspectives to achieve the strategy: financial, customer, internal business process and learning and growth;
b Suggest at least two indicators for these perspectives.
c Construct a strategy map to demonstrate the relationship between the indicators for each perspective.
Fundamental Accounting Principles Volume II
ISBN: 978-1259066511
14th Canadian Edition
Authors: Larson Kermit, Jensen Tilly