Could this performance measure be made more effective? The Return on Assets (ROAR) percentage shows how profitable a company’s assets are incinerating revenue. An indicator of how profitable a company is relative to its total assets. ROAR gives an Idea as to how efficient management Is at using Its assets to generate earnings. ROAR can be computed as Net Income/ Total Assets. To make it more effective SMS can use: Multiple performance measure, management service histories, or strategy paining. Q 4: In decline the Investment base for evaluating managers of Investment centers. He general question is: What practices will motivate the district mangers to use their 1 OFF Presumably, when his redresser that the actions he takes toward this end be actions hat are in the best interest of the whole corporation. Given this general line of reasoning, evaluate the way Quality computes the investment base for its districts. For each asset category, discuss whether the basis of measurement used by the company is the best for the purpose of measuring districts return on assets. What are the likely motivational problems that could arise in such a system?
What can you recommend to overcome such as functional effects? Yes, in the investment center. The managers are responsibility for the segments, investment and asset base as well as the profits. Usually, evaluate based on the return on assets employed, evaluation might include a variety of measures such as profit, return on investment, residual income, economical valued added and a range of non-financial measures. Hence the manager in the districts should consider about the acquisition of new equipment, which is an investment for the segment.
And also, they evaluated equipment and accounts receivable etc. Based on the return on assets employed. May be it can also be the profit center because the managers usually evaluated in terms of effectiveness in raising segment profit level and controlling costs. SMS should use EVA instead of ROAR as the measure of district and manager performance. Since EVA is the best proxy for shareholder value at the business unit level, improving EVA will also improve the company’s overall performance. The managers district objectives will then be congruent with the company’s overall objectives.
This will induce Mr… Richards to employ additional assets which will promote the growth of both the Columbus district and SMS, such as the one in Ms. Barrette’s proposal. The purchase of the new processing equipment is also in line with the company’s objective to develop techniques and marketing aerogram that would increase market share unidentified industries and geographic markets of specialty metal users. Having the equipment will allow SMS to provide the demand for processed metals in the Columbus District with a short lead-time, addressing the concern of potential customers.
Another aspect of the issue that needs to be looked into is the decision on what assets should be included in the investment base and what expenses should be charged from profits. SMS includes land, warehouse buildings, and equipment at gross book value in its investment base. This results to an EVA that signals a decrease in profitability during the early years of the assets when in fact, profits increased. It will be better for the company to use annuity depreciation so that the profitability calculations will show the correct EVA.
Leased buildings and equipment are also part of the asset base. This motivates managers to lease rather own assets whenever the interest charge that is built into the rental cost is less than the capital charge that is applied to the investment base. Thus, the head office must think carefully before approving the leases of the districts s the managers might Just be using it to window dress their performance. SMS also includes inventory and accounts receivables, without subtracting standard accounts payable, using average values for the period.
This is a good practice because these are representative of the assets used during the period and thus, conceptually a satisfactory measure of the amount that should be related to profits. There be a charge for income taxes? Should corporate overheads be allocated to districts? Should profits be computed on the basis of historical costs or on the basis of replacement costs? Evaluate these issues from the standpoint of their motivational impact on the district managers?
No, while computing district profits for performance evaluation purpose did not charge for income taxes, for each district was calculated based on current inventory replacement values. Expenses were separated into controllable and incontrollable categories. No corporate overhead expenses were allocated to the districts. A few years earlier, the company had considered a proposal to allocate corporate overheads to the districts. However, the proposal had been rejected on the grounds hat the allocation bases were arbitrary and that such expenses could not be controlled at the district level.
So profit should be computed on the basis of historical costs and performance. The motivational impact on the district mangers that thing before taking corporate overheads. Q 6 :Evaluate Quality incentive compensation system . Does the present system motivate district managers to make decisions which are consistent with the strategy of the firm? If not, make specific recommendations to improve the system? The key issue in the case is that the incentive compensation system does not f Quality Metal Servicemen (SMS) because it is tied to the district’s target ROAR.
Acquiring the new processing equipment reduces the incentive bonus of the Columbus District Manager, Mr… Ken Richards,from 11 . 1% to 4. 28% of his base salary. This happens because the asset base increases with the new equipment and will exceed the target for 1992. This may motivate him to not proceeding the purchase even if the proposal of the Sales Manager, Ms. Elizabeth Barrett, shows that the acquisition results to a positive NP and thus, should be sent to the home office for approval. Summary of 7-3 for rebuttal Quality Metal Service Center is a metal distributor, who sells to smaller users of metal products.
To be competitive they have to have a shorter lead time and better customer service to cover their costs and make their products a good investment for the customers. They have 3 main objectives: first is to focus sales efforts on markets of specialty users. Quality focuses sales on specialty high tech metals. The second database technologies so they have an accurate, up to date sales forecast, which helps them prepare for orders before they occur, which will shorten lead time and improve services. The third objective is to develop techniques and marketing programs that will increase their market share.
Their fast lead allows customers to use a KIT Oust in time) inventory that avoids high carrying cost. Quality has saved costs using their own KIT system, and can help customers achieve these savings as well. Quality also offers a wide range of processing services which reduces the need for customers to have their own specialty tools and saves time. Management control systems should support implementation of the 3 goals and influence managers to ark toward these goals while maintaining superior quality service to the consumers.
Each of the 4 regions has a manager who is evaluated based on ROAR and wants to exceed the set goal of 90% projected profit. A set of functional managers’ report to Ken Richards, the district manager, who reports to the UP of the Midwest division. Any capital expenditure of more than $10,000 has to be approved by central management; this makes divisions dependent on central management for investment decisions. The district managers are evaluated based on ROAR, and the allocation is split 75% weighted on district and 25% region.
This split may cause a manager to act in the best interest of the district rather than the region or company. Issues: 1 . The $10,000 upper limit on capital expenditures without approval 2. Evaluation based on ROAR and bonus program: AURORA motivates managers to invest in positive NP projects that will increase future cash flows, and The bonus plan is not motivating managers to make those investment decisions, but not investing may be of more benefit to them. 3. Assets over-employed will reduce adjusted profits and the payout rate charged to base salary. 4.
Evaluation scheme is counterproductive towards organizational goals, and managers’ motivation 5. Bonus plan incentive deters managers from making investments that require large asset usage and may have a positive ROAR or EVA result Summary: An important objective of a profit-oriented company is to earn a satisfactory return on the capital that the company invests. In most of the business units, the profit is measured by difference between revenues and expenses. Focusing on profits without considering assets employed to generate those profits is an adequate basis for intro.
Quality Metal Service Center has successfully implemented performance evaluation and incentive structure based on ROAR (Return on Assets) targets. Quality Metal Service Center (SMS) has a history of 100 years as a local metal distributor, grown into a firm with national distribution. In 1991, its sales were well over $750 million. Comic’s core business strategies such as focusing sales efforts on targeted specialty metal users, determining needs based on geographic locations and implementing quality assurance programs through new technologies have helped he company to be leader in the industry.
In early March 1992, Mr… Edward Brown, president and CEO of SMS made observation that company is capable of achieving He insisted team to review controls while evaluating systems to make sure these does not inhibit managers from pursuing goals and above average return on assets, as compared to the industry. This paper will review and analyze Comic’s ROAR (Return on assets) as performance measurement in evaluating managers’ performance and evaluate capital investment proposal by sales manager and its impact on district manager’s incentives.