Advanced Managerial Accounting Assignment
Question 1 - Mason Products Company operates a Pulp Division that manufactures wood pulp for use in the production of various paper products. The following revenue and costs are associated with a ton of pulp:
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$
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Selling Price
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70
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Expenses:
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Variable
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42
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42
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Fixed
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18
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60
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Net Operating Income
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10
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Fixed cost is based on a capacity of 50,000 tons per year. The Pulp Division can sell all of its pulp to outside customers for $70 per ton.
Mason Products Company has just acquired a loss making company that manufactures paper cartons for industrial use. This company will be restructured as a profit centre and named the Carton Division. The Carton Division is currently purchasing 5,000 tons of pulp from a supplier at a cost of $70 per ton less a 10% discount. Mason's president is anxious for the Carton Division to begin purchasing its pulp from the Pulp Division if an acceptable transfer price can be worked out.
Required:
(a) Are the managers of the Carton and Pulp Divisions likely to voluntarily agree to a transfer price for 5,000 tons of pulp? Explain your answer.
(b) If the Pulp Division meets the price that the Carton Division is currently paying to its supplier and sells 5,000 tons of pulp to the Carton Division each year, what will be the effect on the profits of the Pulp Division, the Carton Division, and the company as a whole?
For questions (c) to (e) below, assume that the Pulp Division is currently selling only 30,000 tons of pulp each year to outside customers at $70 per ton.
(c) Are the managers of the Carton and Pulp Divisions likely to voluntarily agree to a transfer price for 5,000 tons of pulp next year? Why or why not.
(d) Assuming that the Carton Division's outside supplier drops its price to only $59 per ton (net of the purchase discount), should the Pulp Division meet this price. Explain your answer. If the Pulp Division does not meet the $59 price, what will be the effect on the profits of the company as a whole?
(e) Refer to question (d) above. If the Pulp Division refuses to meet the $59 price, should the Carton Division be required to purchase from the Pulp Division at a higher price for the good of the company as a whole?
Question 2 - The Media Group has three major divisions: Newspapers, Television and Film Studios. Summary financial data (in millions) for 2013 are as follow:
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Operating Income $m
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Revenue $ m
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Total Assets $m
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Newspapers
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1100
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4600
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4900
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Television
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160
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6400
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3000
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Films Studios
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200
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1650
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2600
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The manager of each division has an annual bonus plan based on division return on investment (ROI). Managers from divisions reporting increases in ROI from prior year are automatically eligible for a bonus. Managers of divisions reporting a decline in ROI have to provide persuasive explanation for the decline to be eligible for any bonus, and they are limited to 50% of the bonus paid to the division managers reporting an increase in ROI.
Kenny, manager of the Newspapers Division, is considering a proposal to invest $200 million in fast-speed printing presses with colour-print options. The estimated increment to 2013 operating income would be $30 million. The Media Group has a 12% required rate of return for investment in all three divisions.
Required:
(a) Use the DuPont method to explain differences among the three divisions in their 2013 division ROI.
(b) Discuss reasons why Kenny might be less than enthusiastic about the fast-speed printing press proposal.
(c) Rupert, chairman of the Media Group, receives a proposal to base manager compensation on division residual income. Compute the residual income of each division in 2013.
(d) Would adoption of a residual income measure reduce Kenny's reluctance to adopt the fast-speed printing press investment proposal?
(e) Rupert seeks your advice on designing a revised bonus plan for division managers of the Media Group. He is considering two proposals:
(i) Reduce the salary of each division manager and make most, if not all, of the division manager's compensation depend on division ROI.
(ii) Reduce the salary of each division manager and make most, if not all, of the division manager's compensation depend on company-wide (the Media Group) ROI.
Discuss how the positive and negative features of each proposal are likely to affect the motivation of the managers.
Question 3 - Choose a company that is listed in Singapore which has not implemented a balanced scorecard.
Assume that the president of the company who is responsible for the company's progress could not understand how after six months of meeting about the company's strategic direction, its performance still seemed to be declining rather than improving. He had just read an article about balanced scorecard. He understands that it is all about communicating corporate strategy throughout the organization and then selecting the right metrics to monitor performance at achieving the strategy. He is keen to implement it and has consulted you to develop a balanced scorecard for the company.
Explain how you would develop a balanced scorecard for the company. Your answer should follow the requirements listed below.
Provide background information of the company being selected.
For each of the balanced scorecard perspectives, provide a strategic objective that best relate to it.
For each strategic objective, identify three most appropriate performance measures that would help the company to achieve its objectives.
Develop a strategy map to support the proposed balanced scorecard.