P1.C.3 Performance Measures

Question 1

What are the four parts of a Balanced Scorecard?

P1.C.3 Performance Measures

Answer 1

1. Financial perspective: sales, liquidity, cost reduction, profitability
2. Internal business process: productivity, waste, defects
3. Customer perspective: satisfaction, market share, returns
4. Learning & growth perspective: skill development, team performance

Question 2

Return on Investment formula (ROI)

P1.C.3 Performance Measures

Answer 2

Evaluates capital investments

=Income of business unit (operating income)/ Assets of business unit (invested capital) or (Average invested assets)

Question 3

Investment Turnover formula

P1.C.3 Performance Measures

Answer 3

=Sales / invested capital

Question 4

Residual Income formula (RI)

P1.C.3 Performance Measures

Answer 4

Excess income over desired rate.

=Operating income - (invested capital x cost of capital)
=Income of business unit - (assets of business unit x required rate of return)

Question 5

Residual Income Benefits & Limitations

P1.C.3 Performance Measures

Answer 5

Benefits

1. Accepts investments that lead to positive income
2. Is a dollar amount, quantifies impact of investment
3. Can set different rates and get comprehensive analysis

Limitations

1. May not fairly evaluate units of different sizes
2. Rate of return may not be available
3. Focuses on short term profitability

Question 6

Return on Investment (ROI) Benefits & Limitations

P1.C.3 Performance Measures

Answer 6

Benefits

1. Easy to understand
2. Universally understood
3. Must be compared to required rate of return

Limitations

1. Disregards factor of time
2. Can be manipulated by management
3. May reject investment with lower return than current ROI even if investment increases shareholders’ equity
4. Focuses on short term profitability

Question 7

Measures of Performance

P1.C.3 Performance Measures

Answer 7

1. Product Profitability
2. Business Unit Profitability
3. Customer Profitability
4. Return on Investment
5. Residual income
6. Balanced Scorecard

Question 8

Return on Investment - DuPont

P1.C.3 Performance Measures

Answer 8

= profit margin x investment turnover

Question 9

Main Purpose of a Strategy Map

P1.C.3 Performance Measures

Answer 9

The point of the strategy map is to show the relationship between non-financial activities that historically were not measured and long-term strategic value.