ABC manufactures door frames which it supplies mostly to house builders. The board of Jack is thinking of implementing a Balanced Scorecard (BSC) to help it manage its strategic performance. Detailed below are the financial performance measures currently used and the Board are looking for your help in the calculation of Residual Income (RI) and Return on Capital Employed (ROCE).

	Y/E 31/12/2019	Y/E 31/12/2018
	$000	$000
Revenue	510	543
Cost of sales	320	300
Gross profit	190	243
Other operating costs	99	90
Operating profit	91	153
Finance cost	26	20
Profit before tax	65	133
Tax	11	27
Profit after tax	54	106
Non-current assets	640	530
Current assets	380	325
Current liabilities	45	32
Non-current liabilities	190	100
WACC	9%	9%

Jack is also considering an investment to enhance production. This investment will shorten production time and reduce costs by the use of digital technology. The investment will have a useful life of four years, after which it will have a scrap value of $0. The financial details on this investment are listed below:

Investment:

Initial cost                                      $86.4 million

Net cash inflow                            $30 million per annum

Cost of capital                              9%

Depreciation policy                              Straight line

For information:

ROI is calculated using controllable profit. Controllable profit is calculated as net cash flows less depreciation.

For future planning purposes, ROI and Residual Income (RI) are calculated using the opening written down value of plant and licence assets in each year.

The Net Present Value (NPV) for the investment is positive.

                       

Required:

1. Calculate the Return on Capital Employed (ROCE) and the Residual Income (RI) for Mars for the year end December 2019 period.  

2. Prepare a summary schedule for the proposed investment for each of the four years ending 31 ^st December 2020 to 31 ^st December 2023 which shows the estimated value of:
   1. Controllable Profit per annum
   2. Residual income for years 1,2,3 and 4
   3. Return on Investment for years 1,2,3 and 4

3. Identify one performance measure for each of the four categories of the Balanced Scorecard (BSC): Financial, Internal, Learning and Growth and Customers.

4. Explain why two of the measures you identified in part c) above are appropriate for Jack.

5. Discuss the nature of “cause and effect” in the BSC as it relates to your suggestions in part d) above.