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Revenues 3,000,000.

00
Variable Expenses (1,000,000.00)
Contribution Margin 2,000,000.00
Controllable Fixed Expenses (800,000.00)
Segment Controllable Margin 1,200,000.00
Non-Controllable Fixed Expenses (1,300,000.00)
Segment Margin (100,000.00)
Common Costs (200,000.00)
Operating Income(Loss) (300,000.00)
DM 3.00
DL 4.00
VMOH 1.00
Fixed Costs 4.00
VS 2.00
FAC 1.00
Produced 100,000.00
Sold 95,000.00
Common Costs 700,000.00

Revenues
Direct Materials 285,000.00
Direct Labor 380,000.00
Variable Overhead 95,000.00
Variable Cost of Sales
Manufacturing Margin
Variable Selling Expenses
Contribution Margin
Fixed Factory Overhead
Segment Controllable Margin
Fixed Administrative Costs
Segment Margin
Common Costs
Operating Income (Loss)
1,900,000.00

(760,000.00)
1,140,000.00
(190,000.00)
950,000.00
(200,000.00) {[(4+1) x 100,000]x40%}
750,000.00
(300,000.00) {[(4+1) x 100,000] x 60%}
450,000.00
(700,000.00)
(250,000.00)
Assets- 2014 900,000.00
Assets- 2015 700,000.00 1,600,000.00
Divide: 2.00
2015 Average Assets 800,000.00

2015 Income 100,000.00


2015 Average Assets 800,000.00
Return on Investment 12.50%
Assets- 2014 2,800,000.00
Assets- 2015 2,000,000.00
Divide:
2015 Average Assets

Operating Income 600,000.00


2015 Average Assets 2,400,000.00
Return on Investment 25.00%
4,800,000.00
2.00
2,400,000.00
Asset Turnover 5.00
Profit Margin 2%
Return on Investment 10.00%

There are 2 ways to improve ROI:


1. Asset turnover: higher asset turnover indicates better revenue gen
2. Profit Margin: either reduce costs or increase revenues
s better revenue generating capacity of assets thereby improving ROI
evenues
oving ROI
ETHYL
Net Sales 200,000.00
Cost of Goods Sold (50,000.00)
Gross Margin 150,000.00
Selling and Admin Expenses (30,000.00)
Net Profit 120,000.00

1) Net Profit 120,000.00


Net Sales 200,000.00
Net Profit Margin 60.00%

2) Net Sales 200,000.00


Average Assets 800,000.00
Asset Turnover 25%

3) Net Profit Margin 60.00%


Multiply: Asset Turnover 25%
Return on Investment 15.00%

OR

Operating Profit 120,000.00


Divide: Average Assets 800,000.00
Return on Investment 15.00%
METHYL
6,300,000.00
(700,000.00)
5,600,000.00
(1,400,000.00)
4,200,000.00

4,200,000.00
6,300,000.00
66.67%

6,300,000.00
42,000,000.00
15%

66.67%
15%
10.00%

4,200,000.00
42,000,000.00
10.00%
Year 1 Year 2
Working Capital 10,000.00 10,000.00
Gross Fixed Assets 20,000.00 20,000.00
Gross Assets 30,000.00 30,000.00
Accumulated Depreciation (2,000.00) (4,000.00)
Total Assets 28,000.00 26,000.00

Average Gross Assets 30,000.00


Average Net Assets 27,000.00

Operating Income 4,000.00


Average Net Assets 27,000.00
Return on Investment 14.81%

Operating Income 4,000.00


Average Gross Assets 30,000.00
Return on Investment 13.33%

Assuming all amounts are the same, impact of depreciation on averag


Year 3 Year 4
10,000.00 10,000.00
20,000.00 20,000.00
30,000.00 30,000.00
(6,000.00) (8,000.00)
24,000.00 22,000.00

30,000.00 30,000.00
25,000.00 23,000.00

4,000.00 4,000.00
25,000.00 23,000.00
16.00% 17.39%

4,000.00 4,000.00
30,000.00 30,000.00
13.33% 13.33%

eciation on average assets creates an artificial increase on ROI


Before Investment
Operating Income 400,000.00
Average Assets 2,000,000.00
ROI 20.00%

If based on ROI, no, however, this clearly shows the cons of using RO
accept/pursue a certain project/investment
Not investing in the project would result in lower income
After Investment
475,000.00
2,500,000.00
19.00%

the cons of using ROI as the only means of deciding whether to

income
Assets- 2014 800,000.00
Assets- 2015 700,000.00
Divide:
2015 Average Assets
Desired Rate of Return
Required Income
Actual Income
Residual Income
1,500,000.00
2.00
750,000.00
12%
90,000.00
120,000.00
30,000.00
Before Investment
Operating Income 400,000.00
Average Assets 2,000,000.00
ROI 20.00%

Actual Income 400,000.00


Minimum Income 240,000.00
Residual Income 160,000.00
After Investment
475,000.00
2,500,000.00
19.00%

475,000.00
300,000.00
175,000.00
Working Capital 90,000.00
Plant and Equipment 860,000.00
Average Assets 950,000.00
Required Rate of Return 20%
Required Income 190,000.00
Residual Income 100,000.00
Actual Income 290,000.00
Cost and Expenses 1,210,000.00
Revenues 1,500,000.00

Actual Income 290,000.00


Average Assets 950,000.00
ROI 30.53%
Required Rate of Return 20.00%
Increase in ROI 10.53%
ETHYL
Net Sales 200,000.00
Cost of Goods Sold (50,000.00)
Gross Margin 150,000.00
Selling and Admin Expenses (30,000.00)
Net Profit 120,000.00

1) Net Profit Margin 60.00%


Multiply: Asset Turnover 25%
Return on Investment 15.00%

2) Average Assets 800,000.00


Desired Rate of Return 5%
Required Income 40,000.00
Actual Income 120,000.00
Residual Income 80,000.00

3) Set by top management


METHYL
6,300,000.00
(700,000.00)
5,600,000.00
(1,400,000.00)
4,200,000.00

66.67%
15%
10.00%

42,000,000.00
5%
2,100,000.00
4,200,000.00
2,100,000.00
After Tax Profit
Total Assets 800,000.00
Current Liabilities (80,000.00)
Assets financed by debt and equity 720,000.00
WACC 6.50%
Cost of Total Assets
Economic Value Added
50,000.00

46,800.00
3,200.00
Earnings before Interest and Tax 800,000.00
Net of Tax Rate 70%
Profit after Tax
Total Assets 4,000,000.00
Current Liabilities (400,000.00)
Assets financed by debt and equity 3,600,000.00
WACC 10.00%
Cost of Total Assets
Economic Value Added
560,000.00

360,000.00
200,000.00
Performance Measure
Service Response Time
Market Share
Gross Margin Percentage
Defect Rates
Information System Availability
New-product Development Time
Economic Value Added
Employee education
Earnings per Share
Manufacturing Cycle Efficiency
Machine Downtime
Number of Patents Held
Employee suggestions
number of repeat sales
Levels of inventories held
Number of vendors used
Cash flow from operation
Employee training hours
Perspective on Balanced Scorecard
Customers
Customers
Financial
Internal Business Process
Learning and Growth
Internal Business Process
Financial
Learning and Growth
Financial
Internal Business Process
Internal Business Process
Learning and Growth
Learning and Growth
Customers
Internal Business Process
Internal Business Process
Financial
Learning and Growth
Waiting Time 6 days
Process Time 7 days
Move Time 4 days
Inspection Time 1 day
Queue Time 2 days
Delivery Cycle Time 20 days

Process Time 7 days


Move Time 4 days
Inspection Time 1 day
Queue Time 2 days
Manufacturing Time 14 days

Value Added Production Time 7 days

Value Added Production Time 7 days


Delivery Cycle Time 20 days
Delivery Cycle Efficiency 35.00%

Value Added Production Time 7 days


Manufacturing Time 14 days
Manufacturing Cycle Efficiency 50.00%