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1. Selling Expenses and Variance Analysis Green-Bicycles Company-(Answered)

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1. Selling Expenses and Variance Analysis

Green-Bicycles Company uses the following reports to evaluate the performance of marketing managers. The division has a practical capacity of 12,000 units for sales.

Actual

Master Budget

Sales units

9,000

10,000

Sales Revenue

729,000

800,000

Fixed selling expenses

115,000

120,000

Industry total sales in units

420,000

500,000


1. Evaluate the performance of the division manager on sales revenue. Show revenue market-size and market-share variances and briefly comment on the overall performance of the marketing team.

Market-size variance =

Market-share variance=

Overall performance:

2. List two most critical improvements that you would make to the evaluation system of the fixed selling expenses of the marketing. Please be specific.

(i)_____________________________________________________________________________________________________

(ii)____________________________________________________________________________________________________

2. Value & Performance

You have reformulated your balance sheet and income statement of a newspaper company (Washington Daily) as follows. All dollar amounts are in millions:

12/31/14

Operating Assets

$4,800

Operating liabilities

1,700

Net Operating Assets

3,100

Financial Obligations

300

Fnancial Assets

600

Net Financial Obligations

-300

Common shareholders' Equity

?

Sales Revenue

$4,400

Operating Income (after taxes)

400

Net Financial Income (after taxes)

20


Use the 2014 balance sheet amounts as a denominator where appropriate (as 2013 data were not available). Round up to a dollar and a 3-decimal point.

1. Washington Daily bought back $200 (in millions) of its own stocks during the fiscal year 2014 and it borrowed the same amount from a bank. The reformulated financial statements above did NOT include the effects of the stock repurchases (which reduce shareholders' equity) and additional borrowing. Compute the new financial leverage ratio (FLEV) and show the following equation works after the stock repurchases.

The stock repurchases reduced net financial income from $20 to $10.

ROE = RNOA + [FLEV x (RNOA - NBC)]

Briefly discuss how the stock repurchases might affect the earnings per share (EPS) and the (intrinsic) value of Washington Daily.

2. If the Washington Daily could reduce operating expenses (after taxes) through Activity-Based Management that could increase 5 percent of the operating profit margin ratio (PM) in 2014 (for example, a 5% of PM increases to a 10% of PM), what could be the new RNOA and residual operating income (ReOI) in 2014? The required return for operations is 10%.

3. What will you do to improve the (intrinsic) value of Washington Daily? Please list two most critical improvements that you will make. Your answer should be specific to Washington Daily.

4. Washington Daily currently evaluates the senior executives based on ROE and considers new performance measures, as it will introduce a Balanced Scorecard. It has been pursuing its strategic advantage of customer solution. List one most critical ?financial? performance measure (excluding RNOA and ReOI) and two most critical ?non-financial? performance measures for Customer and internal perspectives that Washingon Daily should include on the balanced scorecard to align with its strategy.

Financial:

Non-Financial:

5. This question is not related to Washington Daily above. The following is extracted from the balance sheet of Home Plus at December 31, 2014 (in millions of dollars).

Net operating assets ?

Net financial assets $9,000

Common shareholders' equity $4,800

Managers are forecasting Net Income of $2,625 (in million) and Net Financial Income of $360 (in millions) for the year ending December 31, 2015. Forecast the Operating Income and the Residual Operating Income (ReOI) for 2015 (first find the Net Operating Assets in 2014 from data above). Use Net Operating Assets in 2014 and a required return of 10% for operations for ReOI (for simplicity).


1. Selling Expenses and Variance Analysis

 

Green-Bicycles Company uses the following reports to evaluate the performance of marketing

 

managers. The division has a practical capacity of 12,000 units for sales.

 


 

Sales units

 

Sales Revenue

 


 

Fixed selling expenses

 

Industry total sales in units

 


 

Actual

 


 

Master Budget

 


 

9,000

 

729,000

 


 

10,000

 

800,000

 

120,000

 


 

115,000

 

420,000

 


 

500,000

 


 

1. Evaluate the performance of the division manager on sales revenue. Show revenue market-size

 

and market-share variances and briefly comment on the overall performance of the marketing

 

team.

 

Market-size variance =

 

Market-share variance=

 

Overall performance:

 

2. List two most critical improvements that you would make to the evaluation system of the fixed

 

selling expenses of the marketing. Please be specific.

 

(i)_____________________________________________________________________________________________________

 

(ii)____________________________________________________________________________________________________

 

2. Value & Performance

 

You have reformulated your balance sheet and income statement of a newspaper company (Washington

 

Daily) as follows. All dollar amounts are in millions:

 

12/31/14

 

Operating Assets

 

$4,800

 

Operating liabilities

 

1,700

 

Net Operating Assets

 

3,100

 

Financial Obligations

 

300

 

Fnancial Assets

 

600

 

Net Financial Obligations

 

-300

 

Common shareholders' Equity

 

?

 

Sales Revenue

 

$4,400

 

Operating Income (after taxes)

 

400

 

Net Financial Income (after taxes)

 

20

 


 

Use the 2014 balance sheet amounts as a denominator where appropriate (as 2013 data were not

 

available). Round up to a dollar and a 3-decimal point.

 

1. Washington Daily bought back $200 (in millions) of its own stocks during the fiscal year 2014

 

and it borrowed the same amount from a bank. The reformulated financial statements above did

 

NOT include the effects of the stock repurchases (which reduce shareholders' equity) and

 

additional borrowing. Compute the new financial leverage ratio (FLEV) and show the following

 

equation works after the stock repurchases.

 

The stock repurchases reduced net financial income from $20 to $10.

 

ROE = RNOA + [FLEV x (RNOA - NBC)]

 

Briefly discuss how the stock repurchases might affect the earnings per share (EPS) and the

 

(intrinsic) value of Washington Daily.

 


 

2. If the Washington Daily could reduce operating expenses (after taxes) through Activity-Based

 

Management that could increase 5 percent of the operating profit margin ratio (PM) in 2014 (for

 

example, a 5% of PM increases to a 10% of PM), what could be the new RNOA and residual

 

operating income (ReOI) in 2014? The required return for operations is 10%.

 


 

3. What will you do to improve the (intrinsic) value of Washington Daily? Please list two most

 

critical improvements that you will make. Your answer should be specific to Washington Daily.

 


 

4. Washington Daily currently evaluates the senior executives based on ROE and considers new

 

performance measures, as it will introduce a Balanced Scorecard. It has been pursuing its

 

strategic advantage of customer solution. List one most critical ?financial? performance measure

 

(excluding RNOA and ReOI) and two most critical ?non-financial? performance measures for

 

Customer and internal perspectives that Washingon Daily should include on the balanced

 

scorecard to align with its strategy.

 

Financial:

 

Non-Financial:

 


 

5. This question is not related to Washington Daily above. The following is extracted from the

 

balance sheet of Home Plus at December 31, 2014 (in millions of dollars).

 

Net operating assets

 

Net financial assets

 

Common shareholders' equity

 


 

?

 

$9,000

 

$4,800

 


 

Managers are forecasting Net Income of $2,625 (in million) and Net Financial Income of $360 (in

 

millions) for the year ending December 31, 2015. Forecast the Operating Income and the Residual

 

Operating Income (ReOI) for 2015 (first find the Net Operating Assets in 2014 from data above).

 

Use Net Operating Assets in 2014 and a required return of 10% for operations for ReOI (for

 

simplicity).

 


 

 

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