Chapter 10 Decentralization

1
Chapter 10 - Decentralization

• Prior to class
• Fill in the BLANKS
• Answer any questions, complete HW assignments and
  turn in ONLY what is asked for in appropriate
  format, (EXCEL, WORD, etc.) with headers
  footers, on the due date
• Make a copy of all work to be turned in
• Dont forget P10-13 due on 11/7

2
Decentralization in Organizations
Advantages of Decentralization
3
Decentralization in Organizations
Disadvantages of Decentralization
4
Decentralization and _________ Reporting

• A _________ is any part or activity of an
  organization about which a manager seeks cost,
  revenue, or profit data and . . .

5
Can be . . .

• _______ Center
• A segment whose manager has control over
  _____,
• but not over revenues or investment funds.

6
Can be . . .

• ______ Center
• A segment whose manager has control over both
  ______ and ___________,
• but no control over investment funds.

7
Can be . . .

• __________ Center
• A segment whose manager has control over
  _____, __________, and ____________ in operating
  assets.

8
Cost, Profit, and Investments Centers
Are all called?
9
___________ and __________ Costs
10
Return on Investment (ROI) Formula
Write out the ROI formula/exquation explaining
each part
11
Return on Investment (ROI) Formula

• Calculate the ROI from the following information
• Regal Company reports the following
• Net operating income 30,000
• Average operating assets 200,000
• Sales
  500,000

12
Return on Investment (ROI) Formula
13
Return on Investment (ROI) Formula
To be filled in during class
14
Controlling the Rate of Return

• Three ways to improve ROI . . .

15
Controlling the Rate of Return
Regals manager was able to increase sales to
600,000 which increased net operating income to
42,000. There was no change in the average
operating assets of the segment.
Lets calculate the revised ROI.
16
Return on Investment (ROI) Formula
Compute the NEW ROI for REGAL
ROI increased from 15 to ____
17
Quick Check ?

• Redmond Awnings, a division of Wrapup Corp.,
  has a net operating income of 60,000 and average
  operating assets of 300,000. The required rate
  of return for the company is 15. What is the
  divisions ROI?
• a. 25
• b. 5
• c. 15
• d. 20

18
Quick Check ?

• Redmond Awnings, a division of Wrapup Corp.,
  has a net operating income of 60,000 and average
  operating assets of 300,000. If the manager of
  the division is evaluated based on ROI, will she
  want to make an investment of 100,000 that would
  generate additional net operating income of
  18,000 per year?
• a. Yes
• b. No

19
Quick Check ?

• The companys required rate of return is 15.
  Would the company want the manager of the Redmond
  Awnings division to make an investment of
  100,000 that would generate additional net
  operating income of 18,000 per year?
• a. Yes
• b. No

20
HW Scenario Due MWF 4/3 TR 4/4 (to be turned
in)

• You were recently hired as the manager of a chain
  of jewelry stores that are located in downtown
  Chicago. You are excited about the high level of
  autonomy that you have been given to run the
  stores but are nervous because youve heard
  rumors that the previous manager was let go
  because the return on investment (ROI) of the
  stores was unacceptable. What steps should you
  consider to improve ROI?

21
Homework

• Brief Exercise 2, pp. 443-444
• DUE
• MWF 4/3
• TR 4/4

22
Residual Income
When residual income is used to measure
performance, the objective is to ________ the
total amount of residual income, not to
___________ ROI.
23
Residual Income

• A division of Zepher, Inc. has average operating
  assets of 100,000 and is required to earn a
  return of 20 on these assets.
• In the current period the division earns 30,000.

Lets calculate residual income.
24
Residual Income
25
Quick Check ?

• Redmond Awnings, a division of Wrapup Corp.,
  has a net operating income of 60,000 and average
  operating assets of 300,000. The required rate
  of return for the company is 15. What is the
  divisions residual income?
• a. 240,000
• b. 45,000
• c. 15,000
• d. 51,000

26
Quick Check ?

• If the manager of the Redmond Awnings division
  is evaluated based on residual, will she want to
  make an investment of 100,000 that would
  generate additional net operating income of
  18,000 per year?
• a. Yes
• b. No

27
Motivation and Residual Income
Residual income encourages managers to make
____________ investments that would be ________
by managers using ROI.
28
Homework

• Brief Exercise 3, p. 444
• Due
• MWF 4/5
• TR 4/4

29
HW Due MWF 4/7 TR 4/6(to be turned in)

• Rains Ltd. of Spain has two engineering
  consulting divisions that operate in Perth and
  Darwin. Selected data on the two divisions
  follow

• Compute the ROI for each division.
• Assume that the co. evaluates performance by use
  of residual income and that the min. required
  return of any division is 16. Compute the
  residual income for each division.
• Is the Darwin Divisions greater residual income
  an indication that it is better managed?

30
Divisional Comparison
You would expect a larger division to have
_______________ residual income than a smaller
division, not necessarily because it is better
managed but simply because it is bigger.
31
Homework

• Exercise 6, p. 445
• Due
• MWF 4/7
• TR 4/6

32
End of Chapter 10