Performance Evaluation - Assignment

Balanced scorecards incorporating financial performance metrics and qualitative performance objectives can measure past performance and provide organizations with feedback. Some widely used financial performance metrics include return on investment, residual income, and economic value added. These metrics help managers evaluate divisional performance.

Before beginning work on this assignment,

• The assignment consists of 2 parts: 1) Resolving the Excel Base on the Case Study and 2) Word document.
• Read Chapter 10:Decentralization: Responsibility Accounting, Performance Evaluation, and Transfer Pricing in the textbookCost Management.
• Read Chapter 13:Strategic-Based Control Systems and the Balanced Scorecard of textbook,Cost Management.
• Formatted accordingtoAPA StyleLinks to an external site.
• Read theFinal Project Case StudyDownload Final Project Case Study
• Review the following for an overview of the Performance Analysis of a firm.
• Must be at least 5 pages and at least 3 scholarly sources (please do not double space)in length (not including title and references pages)

Evaluate Performance of a Firm

• ROI, Residual Income, EVA
• Return on Equity
• Stockholder Return
• Benchmark

ROI, RESIDUAL INCOME, EVA

Advantages

• No divisional conflicts when applied at the firm level.
• Other advantages similar to division-level advantages.

Disadvantages

• Disadvantages similar to division-level disadvantages.

RETURN ON EQUITY

Advantages

• Encourages executives to monitor all aspects of the business: sales, expenses, and investments.
• Encourages cost efficiency.
• Discourages excessive investment in operating assets.

Disadvantages

• Encourages focus on short-term over long-term results.
• Does not account for cost of capital.

STAKEHOLDER RETURN

Advantages

• Aligns with Intrinsic overall goalshareholder value.
• Market determined; executives cannot directly impact.

Disadvantages

• Encourages focus on short-term over long-term results.
• Subject to market volatility that is inconsistent with the firm's actual performance or executive behavior.

BENCHMARK

Advantages

• Places the firm in the context of its industry/market.

Disadvantages

• Encourages focus on short-term over long-term results.
• May encourage over-investment in assets.

In your Final Project Part 1, you will submit two items to Waypoint

• an MS Excel spreadsheet and
• a paper (Word document).

PART 1 OF THE ASSINGMENT - EXCEL DOCUMENT

In theWeek 5 Final Project Part 1 TemplateDownload Week 5 Final Project Part 1 Template(MS Excel), calculate the following:

1. Return on investment (ROI) for three years, including all elements
   1. Average operating assets
   2. Operating income margin
   3. Operating asset turnover
2. Economic value added (EVA) for the most recent year, including all elements
   1. Dollar amount of debt and equity
   2. After-tax cost of capital on debt
   3. Weighted cost of debt and weighted cost of equity
   4. Total weighted average cost of capital (WACC)
   5. Total dollar amount of capital employed
   6. After-tax operating income

PART 2 OF THE ASSIGNMENT- WORD DOCUMENT

1. Explain the features of, and reasons for, a strategic-based control system and the balanced scorecard tool.
2. Explain how scorecard measurement differs from activity-based management systems.
3. Identify four major similarities and three major differences between scorecard measurement and activity-based management systems.
4. Describe the four primary perspectives used in the balanced scorecard and the link between a company's strategy and these perspectives.
5. Include examples of objectives for each perspective.
6. Explain the role of contrasting performance measures within a balanced scorecard.
7. Discuss lead/lag measures, subjective/objective measures, and internal/external measures.
8. Explain how a balanced scorecard might be used to drive organizational change.
9. Evaluate Branston Soda Company's performance based on the financial measures set in the balanced scorecard in the Final Project Case Study.

FINAL PROJECT CASE STUDY

Part 1

Branston Soda Company manufactures soda. In 20x0, Branston earned $12.0 million in operating income and had total capital of $74 million. Branston's total capital is 65 percent equity and 35 percent 10-year bonds paying 4 percent interest. Branston's marginal tax rate is 25 percent. The company's CFO believes 16 percent is an appropriate required equity rate of return.

The soft drink industry is very mature, with a few key competitors. Annual soda sales growth is minimal - typically coinciding with inflation - and market share increases are difficult to obtain. The CEO believes that the company's future financial performance will be similar to the prior year's results due to the nature of the industry. As a result, the CEO is interested in pursuing growth opportunities through a new product launch.

Table 1

Financial Information

Branston Soda Company	20x7	20x8	20x9	20x0
Sales	$58,000,000	$60,000,000	$63,000,000	$66,150,000
Cost of goods sold	41,760,000	43,200,000	45,360,000	47,628,000
Gross profit	$16,240,000	$16,800,000	$17,640,0000	$18,522,000
Selling, General, & Administrative (SG&A)	3,440,000	3,750,000	4,564,000	5,222,000
Depreciation	950,000	1,050,000	1,000,000	1,100,000
Operating Income	$11,850,000	$12,000,000	$12,076,000	$12,200,000
Interest expense	948,000	992,000	984,000	1,021,000
Pretax income	$10,902,000	$11,008,000	$11,092,000	$11,179,000
Taxes	2,725,500	2,752,000	2,773,000	2,794,750
Net income	$8,176,500	$8,256,000	$8,319,000	$8,384,250
Total Operating Assets	$68,000,000	$72,000,000	$72,000,000	$74,000,000

Table 2

Balanced Scorecard

Perspective	Objectives	Measures	Targets
Financial	Increase shareholder value Increase profitability Maintain market share	EVA ROI Margin Growth in revenues	EVA: + and increasing ROI: 18% or higher 15% and increasing Equal to inflation
Customer
Process
Infrastructure

Part 2

New Product Launch - Seltzer Products

Branston is contemplating launching a new product - a hard seltzer. The hard seltzer will be a carbonated vodka drink in various fruit flavors such as lemon-lime, cranberry, and orange. Branston would launch the product from a new, distinct division called Seltzer Products. Branston's market research indicates that its major competitor's recent seltzer product launch has enticed consumers to demand more of these products. The opportunity to get into the market for hard seltzer is immediate and urgent, as Branston suspects other competitors are also developing new hard seltzer products. Branston believes that companies that launch new products in the next year have an opportunity to secure market share with consumers. Conversely, companies that do not launch this year will likely be unable to compete in the crowded market for seltzer products in the following years as the market will quickly become stable with consumers settled on their product or brand preferences.

Branston would finance the initial investment costs of the Seltzer Products division entirely with cash, so its capital structure would not change. Branston expects to depreciate the Seltzer Products division plant & equipment on a 10-year, straight-line basis. Total initial investment costs for the launch of the Seltzer Products are listed below.

Table 3

Initial Investment Costs

Plant & equipment $2,760,000

Initial working capital $240,000

Total initial investment: $3,000,000

Branston expects to sell 600,000 cans of hard seltzer in the first year, 1 million cans in the second year, and 2 million cans in the third year. After the third year, Branston believes the hard seltzer market will be mature and expects nominal growth of 3% per year. As a result, variable selling expenses will increase as Branston will offer promotions with price cuts to maintain market share. Product costs are projected as follows:

Table 4

Division Projections

Seltzer Products	20x1	20x2	20x3	20x4	20x5
Cans	600,000	1,000,000	2,000,000	3% growth	3% growth
Sales price per can	$4.00	$4.00	$4.00	$4.00	$4.00
Direct materials per can	$0.75
Direct labor per can	$1.00
Variable overhead per can	$0.50
Variable selling costs per can	$0.10	$0.10	$0.10	$0.15	$0.25
Total fixed factory overhead	$400,000	$600,000	$800,000	$800,000	$800,000
Total Selling, General, & Administrative (SG&A)	$200,000	$210,000	$220,000	$235,000	$250,000

Branston has the following projections for total operating assets and working capital investments for each year for the Seltzer Products division:

Table 5

Division Financial Information

Seltzer Products	20x1	20x2	20x3	20x4	20x5
Total Operating Assets	$2,724,000	$2,608,000	$2,732,000	$2,481,000	$2,230,000
Investment in Working Capital	$240,000	$160,000	$400,000	$25,000	$25,000