Department of Accounting

BEA2010: Managerial Accounting

Case study report - TurnAround

TurnAround produces paper-based consumer products such as diapers, incontinence

products, female hygiene products and various consumer tissues such as cleaning napkins and
toilet paper.
Turnaround is organised into three business units: adult care, family care and child care. The
managers of these units are responsible for most of the activities of their particular unit and
are currently evaluated on earnings before interest expenses and taxes. For a couple of
years, the corporate profitability has declined and a new CFO was appointed. She suggested a
redesign of the entire management control system, beginning with changes to the
management control structure: We are in a business where low margins are common so we
also need to address the assets employed. The divisions should be responsible for profit,
including marketing, but also for the assets employed in their business unit, she said.
This also brought to the fore the issue of how to measure the performance of the established
investment centres. The CEO knew that return on investment (ROI) was a quite common
performance measure in other organisations and suggested the use of that measure. However,
the CFO emphasised that residual income (RI) or economic valued added (EVA) were more
appropriate performance measures for investment centres. She estimated that the cost of
capital to be used in the RI calculations was 12 per cent and the cost of capital to be used in
the EVA calculations was 11 per cent. The CFO also made a few initial adjustments of the
financial accounting numbers to be used when calculating EVA. These adjustments were
primarily related to capitalising R&D expenses and brand-building activities. The financial
figures of the three divisions are shown in the table below (m):
Child care
division
1,600
3,800
1,100
1,300
650
550

Non-current assets (Book value)

Non-current assets (Adjusted)
Working capital (Book value)
Working capital (Adjusted)
Earnings before interest and tax (Book value)
Adjusted net operating profit after tax

Adult care
division
1,600
3,100
700
1,000
720
525

Family care
division
1,750
2,100
2,000
2,200
850
650

Required:
1. For each of the three divisions:
a) Calculate ROI and analyse the levels. (5%)
b) Calculate RI and analyse the levels. (5%)
c) Calculate EVA and analyse the levels. (5%)
Show your workings clearly for each of your calculations above.
2. Compare, analyse and discuss your results above when measuring the performance of
these divisions via the three approaches. (35%)
3. The CEO and the CFO of TurnAround also want some additional information about
ROI, RI, and EVA. Explain and discuss the potential benefits and drawbacks relating
to each approach. Your discussion should consider which approach is most
appropriate for evaluating divisional performance and should conclude with a
justification of your preferred approach. (50%)

Notes
This is a group piece of work; it counts 70% towards the final mark. You are expected to
work on this piece of work with the same group members you worked for the purpose of the
presentation (see ELE for information on which group you ve been allocated). Each group
will have to submit a report (up to 2,500 words long) addressing the questions above. The
deadline to submit the case study report is Friday, December 5. Please submit a word
document on ELE. Use font: Times New Roman, font size: 12, line spacing: double and a
consistent referencing style, if you use any references (note that this is not necessary). Each
group member should also complete the form available on ELE outlining and evaluating their
own as well as each group members contribution to this piece of work and submit this to the
course convenor (more information will be provided about this soon).
Feedback will be provided, Term 2 week 1.