Chapter 07: Performance Measurement in Decentralized Organizations
EXERCISE 11–3 Measures of Internal Business Process Performance [LO11–3]
Management of Mittel Rhein AG of Köln, Germany, would like to reduce the amount of time
between when a customer places an order and when the order is shipped. For the first quarter of
operations during the current year the following data were reported:
Inspection time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.3 days
Wait time (from order to start of production) . . . . . . . . 14.0 days
Process time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.7 days
Move time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.0 days
Queue time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.0 days
Required:
1. Compute the throughput time.
2. Compute the manufacturing cycle efficiency (MCE) for the quarter.
3. What percentage of the throughput time was spent in non–value-added activities?
4. Compute the delivery cycle time.
5. If by using Lean Production all queue time during production is eliminated, what will be
the new MCE?
Requirement 01:
Calculation of throughput time = Process time + Inspection time + Move time + Queue time
= 2.7 days + 0.3 days + 1.0 days + 5.0 days
= 9.0 days
Requirement 02:
Manufacturing Cycle Efficiency (MCE) is calculated by considering only value added time as
process time, therefore MCE = Value-added time/ Throughput time
= 2.7 days/ 9.0 days
= 0.30
Requirement 03:
The MCE is 0.30 or 30% which indicates that 30% of the throughput time was spent in value-
added activities. Consequently, remaining 70% of the throughput time was spent in non-value
added activities.
Requirement 04:
Delivery Cycle Time = Waiting time + Throughput time
= 14.0 days + 9.0 days
= 23.0 days
Requirement 05:
If all queue time is eliminated then the throughput time will be (2.7 days + 0.3 days + 1.0 days)
Or 4.0 days.
Then the new MCE will be = Value-added time/ Throughput time
= 2.7 days/ 4.0 days
= 0.675
Chapter 07: Performance Measurement in Decentralized Organizations
EXERCISE 11–5 Return on Investment (ROI) [LO11–1]
Provide the missing data in the following table for a distributor of martial arts products:
Division
Alpha Bravo Charlie
Sales . . . . . . . . . . . . . . . . . . . . . . . . . $? $11,500,000 $?
Net operating income . . . . . . . . . . . . $? $ 920,000 $210,000
Average operating assets . . . . . . . . . $800,000 $? $?
Margin . . . . . . . . . . . . . . . . . . . . . . . . 4% ? 7%
Turnover . . . . . . . . . . . . . . . . . . . . . . . 5 ? ?
Return on investment (ROI) . . . . . . . . ? 20% 14%
Division
Alpha Bravo Charlie
Sales (a). . . . . . . . . . . . . . . . . . . . . . . . . $4,000,000 $11,500,000 $3,000,000
Net operating income (b). . . . . . . . . . . . $160,000 $ 920,000 $210,000
Average operating assets (c). . . . . . . . . $800,000 $4,600,000 $1,500,000
Margin (b)/(a). . . . . . . . . . . . . . . . . . . . . . . . 4% 8% 7%
Turnover (a)/(c). . . . . . . . . . . . . . . . . . . . . . . 5 2.5 2
Return on investment (ROI) . . . . . . . . 20% 20% 14%
Decision: From the above data, we see that both divisions Alpha and Bravo obtain same percentage
of return though they have follow different strategies. Division Alpha has a low margin along with
higher turnover, whereas division Bravo has higher margin along with low turnover.
EXERCISE 11–6 Contrasting Return on Investment (ROI) and Residual Income [LO11–1,
LO11–2] Meiji Isetan Corp. of Japan has two regional divisions with headquarters in Osaka and
Yokohama. Selected data on the two divisions follow:
Division
Osaka Yokohama
Sales . . . . . . . . . . . . . . . . . . . . . . . . . $3,000,000 $9,000,000
Net operating income . . . . . . . . . . . . $210,000 $720,000
Average operating assets . . . . . . . . . $1,000,000 $4,000,000
Required:
1. For each division, compute the return on investment (ROI) in terms of margin and turnover.
Where necessary, carry computations to two decimal places.
2. Assume that the company evaluates performance using residual income and that the mini-
mum required rate of return for any division is 15%. Compute the residual income for each
division.
Chapter 07: Performance Measurement in Decentralized Organizations
3. Is Yokohama’s greater amount of residual income an indication that it is better managed?
Explain.
Requirement 01:
Net Operating Income Sales
ROI = Average Operating Assets
Sales
210,000 3,000,000
ROI for Osaka Division = 3,000,000 1,000,000
= 21%
720,000 9,000,000
ROI for Yokohama Division = 9,000,000 4,000,000
= 18%
Requirement 02:
Osaka Yokohama
Average Operating Assets (a) 1,000,000 4,000,000
Net Operating Income 210,000 720,000
Minimum required return on average operating assets: 150,000 600,000
15% (a)
Residual Income 60,000 120,000
Requirement 03:
No, the Yokohama Division is simply larger than the Osaka Division for that reason one would
expect that it would generate a larger amount of residual income than Osaka Division. Residual
income can’t be used to compare the performance of divisions of different sizes. Larger divisions
will always look better. From requirement 01 it is clear that ROI of Osaka division is 21% whereas
ROI of Yokohama division is 18% which mean that Yokohama division does not appear to be as
well managed as the Osaka division.
