Determining Returns on Investment and Performance
Costs related to the expansion and enhancement of an organization can be just as essential (and large) as costs related to routine business operations. It is important for companies to avoid stagnation and remain abreast of market trends and innovation. This can be achieved through marketing and research and development (R&D), which, as all other business functions, need funding and budgeting. As an HR manager, think about how innovation can be encouraged through initiatives which reward and develop employees.
For this week’s Application, you will analyze costs related to marketing and R&D. You will review the following scenarios and information and use the concepts of return on investment, performance, and other ideas introduced in this week’s Resources to draw conclusions related to questions posed in the prompts.
You will set up and use an Excel spreadsheet for all your calculations for the problems below, and the spreadsheet you develop should be what you turn in for the Application. Note: The Resources section includes tutorials for those who might need help in designing and using an Excel spreadsheet.
- Define a revenue center, a cost center, a profit center, and an investment center. Give an example of each type of center. Where appropriate refer to specific examples within Human resources.
- Harrison Handbags has an advertising budget of $150,000. The company believes that if it increases the advertising budget by $24,000, it will sell an additional 32,000 purses and each purse will provide an additional profit to the company of $1.00 before consideration of the advertising costs. What additional profit should the company expect if it accepts the proposed budget increase?
- Brent Bybee is the manager of the packaging department of the Carnival Candy Company. He is responsible for all costs of his department except rent, property taxes, and salaries.
Budgeted costs for his department for the month of April were:
Labor $12,000 Materials 7,500 Supplies 1,700 Maintenance 3,500 Property taxes 1,000 Rent 1,800 Salaries 10,000 Utilities 5,000
Actual costs for the month of April were:
Labor $12,200 Materials 10,200 Supplies 1,650 Maintenance 3,500 Property taxes 1,100 Rent 1,800 Salaries 10,000 Utilities 5,000
Determine the variances for each cost for which Brent is responsible. Then, as the plant manager, write a memo to Brent analyzing your findings and discussing how you want to proceed.
- The company of Holman’s and Sons has manufactured hockey sticks for more than 10 years. In 2007, Holman’s acquired Leavitt’s Lumber, which supplies materials for the hockey sticks. Holman’s designated its corporate headquarters as an investment center. In addition, Holman’s uses return on investment (ROI) to measure performance. Management bonuses are based in part on ROI. All investments are expected to earn a minimum rate of return of 15%.
Leavitt’s Lumber Company’s ROI has ranged from 17.2% to 19% since it was acquired. Leavitt’s had an investment opportunity in 2010 that had an estimated ROI of 16%. At the end of 2010, it was determined that Leavitt’s Lumber ROI for the year was 17%. Residual income for Leavitt’s Lumber in 2010 was $150,000.
As part of the management team at Leavitt’s Lumber, if you used ROI as the performance measure, would you have accepted the investment opportunity? If you had used residual income as the performance measure, would you have accepted the investment opportunity? Explain in detail your decision.