【正文】 local managers are aware of these conditions, whereas higherlevel managers may not be. This can lead to more informative decision making. 4. Margin = Net ine/Sales, and Turnover = Sales/Average operating assets. By breaking ROI into margin and turnover, more insight into why ROI may change from one period to the next is possible. 5. Three advantages of ROI include: (1) ROI encourages managers to pay attention to the relationships among sales, expenses, and investment. (2) ROI encourages cost efficiency. (3) ROI discourages excessive investment in operating assets. Increased profitability can be achieved (all other things being equal) by increasing revenues, decreasing expenses, or lowering investment. 6. Two disadvantages of ROI are: (1) ROI may discourage managers from investing in projects that would increase the profitability of the firm but decrease the division’s ROI. (2) It also may encourage managers to focus on shortrun profitability and to take actions that may harm longrun profitability. 7. Residual ine is the difference between ine and the minimum dollar return required on an investment. Residual ine encourages investment in all projects that earn at least the minimum rate of return. 8. EVA is economic value added. It is the difference between aftertax ine and the cost of the capital employed. EVA is an absolute dollar amount, not a percentage rate of return like ROI. EVA differs from residual ine in EVA’s use of aftertax ine and the true cost of capital (rather than a hurdle rate). 9. A stock option is the right to purchase a certain amount of stock at a fixed price. It can encourage goal congruence by giving managers an ownership stake in the firm, encouraging them to view operations from a longrun perspective. 10. A transfer price is the price charged for goods that are transferred from one division to another division of the same pany. 11. The transfer pricing problem is finding a transfer price that simultaneously satisfies three objectives: accurate performance evaluation, goal congruence, and preservation of divisional autonomy. 12. Agree. Because at least one division will be made better off and firm profits will increase. 13. If a perfectly petitive outside market exists, the transfer price should be market price. Minimum price = maximum price = market price. Any other price would make at least one division worse off, and firm profits may decrease if the price is not market price. 14. Full cost, full cost plus, variable cost plus. The major disadvantage is that costbased transfer prices may not reflect the optimal oute for the divisions and the firm. Specifically, it is possible for the transfer price, using one of the costing approaches, to be less than the minimum price or greater than 211 the maximum price. The prices, however, are simple to use and, in some cases, may reflect the oute of a negotiated agreement. 15. Internal Revenue Code Section 482 outlines the transfer pricing methods acceptable for ine tax purposes. The four acceptable methods are the parable uncontrolled price method, the resale price method, the costplus method, and any method jointly acceptable to the IRS and the pany. 212 EXERCISES 10–1 1. Sporting Goods Division ROI: Year 1: $2,800,000/$20,000,000 = 14% Year 2: $3,000,000/$20,000,000 = 15% Sporting Goods Division Margin: Year 1: $2,800,000/$70,000,000 = % Year 2: $3,000,000/$75,000,000 = % Sporting Goods Division Turnover: Year 1: Turnover: $70,000,000/$20,000,000 = Year 2: Turnover: $75,000,000/$20,000,000 = 2. Camping Division ROI: Year 1: $1,200,000/$10,000,000 = 12% Year 2: $1,000,000/$10,000,000 = 10% Camping Division Margin: Year 1: $1,200,000/$24,000,000 = % Year 2: $1,000,000/$25,000,000 = % Camping Division Turnover: Year 1: Turnover: $24,000,000/$10,000,000 = Year 2: Turnover: $25,000,000/$10,000,000 = 3. ROI for the Sporting Goods Division increased from 14% to 15%. This increase is due entirely to the increase in turnover from to . (Margin for this division stayed the same from Year 1 to Year 2.) The Camping Division, on the other hand, experienced a drop in ROI from 12% to 10%. Margin in this division decreased from 5% to 4%, and the small increase in turnover (from to ) was not enough to overe the margin decline. 213 10–2 1. EverTent ROI = $55,000/$500,000 = % KiddieKamp ROI = $38,000/$400,000 = % 2. Add Only Add Only Add Both Maintain EverTent KiddieKamp Projects Status Quo Operating ine ... $ 1,055,000 $ 1,038,000 $ 1,093,000 $ 1,000,000 Operating assets .... 10,500,000 10,400,000 10,900,000 10,000,000 ROI ......................... % % % 10% The manager will invest only in the EverTent since that alternative has the highest ROI. 10–3 1. EverTent residual ine = $55,000 – ( $500,000) = $10,000 KiddieKamp residual ine = $38,000 – ( $400,000) = $2,000 2. Add Only Add Only Add Both Maintain EverTent KiddieKamp Projects Status Quo Operating ine ... $ 1,055,000 $ 1,038,000 $ 1,093,000 $ 1,000,000 M