Performance measurement and control

**Section A** MetroWater, a public utility company, evaluates its regional divisions using Return on Investment (ROI). The Northern Division currently has an ROI of 18%. The company's cost of capital is 12%. The Northern Division manager is considering a new water purification project that will yield an ROI of 15%. How will the manager's decision regarding the new project differ if evaluated on ROI versus Residual Income (RI)?

**Section A** GlobalChem has two divisions. Division A produces a chemical compound and transfers it to Division B. Division A has spare capacity. The variable cost of production in Division A is $25 per liter. The external market price for the compound is $40 per liter. Division B can buy the compound externally for $38 per liter. What is the minimum transfer price per liter that Division A should accept? (Enter your answer as a whole number).

**Section A** EduTech Inc. uses the Balanced Scorecard to measure performance. Which TWO of the following metrics would be classified under the 'Internal Business Process' perspective?

**Section B - Case 3: CareNet** CareNet is a global NGO providing mobile optical clinics in rural areas. They evaluate their performance using the 'Value for Money' (3Es) framework. CareNet recently negotiated a 15% discount on the purchase of diagnostic eye-testing equipment by buying in bulk. Which of the 3Es does this achievement primarily demonstrate?

**Section B - Case 3: CareNet** CareNet is a global NGO providing mobile optical clinics in rural areas. In Region X, CareNet spent $50,000 (Input) to operate clinics for one month. They conducted 2,000 eye exams (Output). As a result, 1,500 people received corrective glasses, and follow-up surveys showed that 1,200 people reported significantly improved quality of life (Outcome/Objective). Calculate the Efficiency metric expressed as 'Cost per eye exam conducted'. (Enter your answer as a whole number).

**Section B - Case 3: CareNet** CareNet is a global NGO providing mobile optical clinics in rural areas. The board wants to implement the Fitzgerald and Moon Building Block model to improve performance measurement across its regional teams. Under the 'Dimensions' block of the Fitzgerald and Moon model, which of the following is classified as a 'Determinant' of performance (rather than a 'Result')?

**Section B - Case 3: CareNet** CareNet is a global NGO providing mobile optical clinics in rural areas. Continuing with the Fitzgerald and Moon model, CareNet sets a standard that '95% of patients must be seen within 30 minutes of their scheduled time'. According to the 'Standards' block of the model, this target must possess three characteristics. Which of the following is NOT one of those three characteristics?

**Section B - Case 3: CareNet** CareNet is a global NGO providing mobile optical clinics in rural areas. The new CFO is struggling to implement a unified performance measurement system across all regions. Which TWO of the following are common difficulties specifically associated with measuring performance in Not-For-Profit (NFP) organizations like CareNet?

**Section C** **QuantumGrid** operates in the renewable energy sector and has two investment centers: SolarGen (which generates solar power) and GridDistribute (which manages the power grid and sells to consumers). **Part A (10 marks)** SolarGen currently generates a Return on Investment (ROI) of 14%. The division's total capital employed is $50 million. QuantumGrid's weighted average cost of capital (WACC) is 10%. SolarGen's manager is considering a new solar farm project requiring an investment of $10 million. The project is expected to generate an annual controllable profit of $1.2 million. Evaluate the new project using both ROI and Residual Income (RI). Discuss the behavioral implications of using ROI versus RI for evaluating the SolarGen manager's performance in this specific scenario. **Part B (10 marks)** SolarGen transfers electricity to GridDistribute. Currently, SolarGen has no spare capacity and can sell all the electricity it generates to the external national grid at a market price of $80 per MWh. The variable cost of generation is $30 per MWh. GridDistribute currently buys electricity from the external market at $80 per MWh but is demanding that SolarGen transfer electricity internally at full cost ($50 per MWh) to improve GridDistribute's profitability. Advise the board of QuantumGrid on the appropriate transfer pricing policy. Calculate the minimum and maximum transfer prices, and discuss the impact on divisional autonomy and goal congruence if the board forces SolarGen to transfer at $50 per MWh.

Section A Horizon Hotels evaluates its regional managers using Return on Investment (ROI). The Northern region currently has an ROI of 18%. The manager is considering a new project that requires an investment of $500,000 and will generate an annual controllable profit of $80,000. The company's cost of capital is 12%. How will the project affect the manager's ROI, and will they accept it if evaluated solely on ROI?

Section A City General Hospital is a not-for-profit organization evaluated on the 'Value for Money' (3Es) framework. The hospital recently negotiated a 10% discount on bulk purchases of surgical masks without compromising on the quality of the masks. Which of the 3Es does this achievement primarily represent?

Section B - Case 3: GlobalCare GlobalCare is an international NGO focused on providing clean drinking water in developing nations. One of GlobalCare's key performance indicators (KPIs) is 'Number of water wells drilled per $100,000 of funding'. Under the 'Value for Money' framework, how should this KPI be classified?

Section B - Case 3: GlobalCare GlobalCare is an international NGO focused on providing clean drinking water in developing nations. Because GlobalCare does not have a profit motive, it relies heavily on non-financial performance indicators (NFPIs). Which TWO of the following are valid reasons why NFPIs are particularly important for an NGO like GlobalCare?

Section B - Case 3: GlobalCare GlobalCare is an international NGO focused on providing clean drinking water in developing nations. GlobalCare wants to improve its logistics for delivering drilling equipment. It decides to study the logistics processes of 'FastTrack', a leading commercial courier company known for its world-class delivery speeds, even though FastTrack is not in the NGO sector. What type of benchmarking is GlobalCare undertaking?

Section B - Case 3: GlobalCare GlobalCare is an international NGO focused on providing clean drinking water in developing nations. The board is considering using Fitzgerald and Moon's Building Block model to design a new performance measurement system. Which of the following is NOT one of the three main categories in the Building Block model?

Section B - Case 3: GlobalCare GlobalCare is an international NGO focused on providing clean drinking water in developing nations. GlobalCare's donors often look at 'League Tables' published by charity watchdogs, which rank NGOs based on the percentage of donations spent directly on programs versus administration. What is a common criticism of using league tables to evaluate public sector or NGO performance?

Section C - Constructed Response 2 AeroParts Multi is a cross-border multinational company. Division A is located in Country X (Corporate tax rate: 30%). It manufactures a specialized aerospace component. Division B is located in Country Y (Corporate tax rate: 15%). It assembles these components into finished engines. Division A's costs for the component: - Variable cost: $400 per unit - Fixed cost: $150 per unit - External market price: $800 per unit Division A has a maximum capacity of 10,000 units and currently sells 8,000 units to the external market. Division B requires 3,000 units of this component. Division B currently buys them from an external supplier for $750 per unit. Head Office wants Division A to supply Division B. Division A's manager refuses to sell for less than the external market price of $800. Division B's manager refuses to pay more than their current external price of $750. Requirements: (a) Calculate the minimum transfer price Division A should accept and the maximum transfer price Division B should pay. (6 marks) (b) Based on your calculations in (a), advise whether a mutually acceptable transfer price exists, and calculate the optimal transfer price from the perspective of the Head Office to minimize global tax liabilities. (6 marks) (c) Discuss the behavioral and motivational issues that arise when Head Office dictates a transfer price to autonomous divisional managers. (8 marks)

**Section A** CityGrid, a public utility, evaluates its regional divisions using Return on Investment (ROI). The Northern Division currently has an ROI of 18%. The company's cost of capital is 12%. The manager of the Northern Division is considering a new infrastructure project that will yield an ROI of 15%. Which of the following statements correctly describes the likely behavior of the manager and the benefit of using Residual Income (RI) instead?

**Section A** GlobalChem has two divisions: Division A produces a chemical compound that can be sold externally or transferred to Division B. Division A is currently operating at full capacity and selling all its output to the external market for $50 per unit. The variable cost of production is $30 per unit. Division B wants to buy the compound from Division A. If Division A transfers internally, it saves $2 per unit in packaging costs. What is the minimum transfer price Division A should accept?

**Section A** ProService, a B2B consulting firm, is implementing the Fitzgerald and Moon Building Blocks model to improve its performance measurement system. According to this model, which TWO of the following are classified as 'Dimensions' of performance?

**Section B - Case 3: ClearFlow Initiative** ClearFlow is a Not-For-Profit (NFP) NGO dedicated to providing clean drinking water in rural communities. They measure their performance using the 'Value for Money' (VFM) framework, often referred to as the 3 Es. During the year, ClearFlow negotiated a bulk discount with a supplier, reducing the cost of purchasing water filtration pumps from $500 per unit to $450 per unit. Which of the 3 Es does this achievement directly demonstrate?

**Section B - Case 3: ClearFlow Initiative** ClearFlow is a Not-For-Profit (NFP) NGO dedicated to providing clean drinking water in rural communities. They measure their performance using the 'Value for Money' (VFM) framework, often referred to as the 3 Es. ClearFlow conducts an annual health survey in the communities where they operate. This year, the survey showed a 40% reduction in waterborne diseases compared to the previous year. Which of the 3 Es does this metric primarily measure?

**Section B - Case 3: ClearFlow Initiative** ClearFlow is a Not-For-Profit (NFP) NGO dedicated to providing clean drinking water in rural communities. They measure their performance using the 'Value for Money' (VFM) framework, often referred to as the 3 Es. ClearFlow's management is reviewing a report that states: 'This year, our engineering teams installed an average of 2.5 water pumps per staff day, compared to 2.0 pumps per staff day last year.' Which of the 3 Es does this metric represent?

**Section B - Case 3: ClearFlow Initiative** ClearFlow is a Not-For-Profit (NFP) NGO dedicated to providing clean drinking water in rural communities. They measure their performance using the 'Value for Money' (VFM) framework, often referred to as the 3 Es. ClearFlow is considering adopting the Balanced Scorecard. However, the traditional Balanced Scorecard was designed for commercial businesses. Which TWO of the following adaptations are typically necessary when applying the Balanced Scorecard to a Not-For-Profit organization like ClearFlow?

**Section B - Case 3: ClearFlow Initiative** ClearFlow is a Not-For-Profit (NFP) NGO dedicated to providing clean drinking water in rural communities. They measure their performance using the 'Value for Money' (VFM) framework, often referred to as the 3 Es. ClearFlow's donors have asked them to participate in a 'League Table' published by an independent charity watchdog, which ranks water NGOs based on the percentage of donations spent directly on charitable activities versus administrative costs. What is a significant behavioral risk of ClearFlow being evaluated via this League Table?

**Section C** **Scenario: EcoPower Utilities** EcoPower is a renewable energy company with two autonomous investment centers: the Generation Division (produces electricity via wind farms) and the Retail Division (sells electricity to residential customers). Financial data for the Generation Division for the year just ended: - Operating Profit: $12,500,000 - Total Assets: $85,000,000 - Current Liabilities: $15,000,000 - EcoPower's Cost of Capital: 10% The Generation Division currently sells 20% of its electricity to the Retail Division and 80% to the national grid (external market). The external market price is $50 per Megawatt hour (MWh). The variable cost of generation is $20 per MWh. Currently, the transfer price between Generation and Retail is set at the external market price of $50 per MWh. The Retail Division manager is unhappy. They argue that because Generation incurs no marketing or grid-connection costs on internal transfers (saving $5 per MWh), the transfer price should be lower. The Retail Division has found an external supplier willing to provide electricity at $46 per MWh. The Generation Division is currently operating at 100% capacity and can sell all the electricity it produces to the national grid at $50 per MWh. **Required:** (a) Calculate the Return on Investment (ROI) and the Residual Income (RI) for the Generation Division for the year just ended. (Assume Capital Employed = Total Assets - Current Liabilities). (6 marks) (b) Based on the general rules of transfer pricing, calculate the minimum transfer price the Generation Division should accept, and the maximum transfer price the Retail Division should pay. (6 marks) (c) Discuss whether the current transfer price of $50 per MWh is optimal for the EcoPower group as a whole, and recommend a course of action to resolve the dispute between the two divisional managers. (8 marks)

Section A A multinational retail chain evaluates its divisional managers based on Return on Investment (ROI). Division X currently has an ROI of 18%. The company's cost of capital is 12%. Division X's manager is considering a new project that yields a return of 15%. What is the likely behavioral outcome of using ROI for this decision, compared to using Residual Income (RI)?

Section A ConsultPro, a management consultancy firm, uses Fitzgerald and Moon's Building Block model to measure performance. Under this model, which of the following falls under the 'Dimensions' block?

Section A CodeCraft is a bespoke software development agency. Management wants to introduce non-financial performance indicators to measure 'Quality' and 'Flexibility' in their service delivery. Which TWO of the following are appropriate non-financial indicators for this agency?

Section B - Case 3: Quantum Nexus Quantum Nexus is a cross-border tech hardware company. Division A (located in Country X) manufactures microchips. Division B (located in Country Y) assembles these chips into smartphones. Division A Data: Variable cost per chip = $120 Fixed cost per chip = $30 External market selling price = $200 Division B Data: External purchase price for similar chips = $190 Variable processing cost to assemble phone = $50 Final selling price of smartphone = $300 Division A currently has SPARE CAPACITY and can meet Division B's demand without losing external sales. What is the minimum transfer price Division A should accept?

Section B - Case 3: Quantum Nexus Quantum Nexus is a cross-border tech hardware company. Division A (located in Country X) manufactures microchips. Division B (located in Country Y) assembles these chips into smartphones. Division A Data: Variable cost per chip = $120 Fixed cost per chip = $30 External market selling price = $200 Division B Data: External purchase price for similar chips = $190 Variable processing cost to assemble phone = $50 Final selling price of smartphone = $300 What is the maximum transfer price Division B should be willing to pay?

Section B - Case 3: Quantum Nexus Quantum Nexus operates internationally. Country X (Division A) has a corporate tax rate of 30%. Country Y (Division B) has a corporate tax rate of 10%. Assuming tax authorities allow some flexibility, which TWO of the following statements describe how Quantum Nexus Head Office might manipulate the transfer price to minimize global tax liabilities?

Section B - Case 3: Quantum Nexus To achieve the tax savings, Quantum Nexus Head Office decides to dictate a transfer price of $120, overriding the divisional managers' autonomy. What is the most likely behavioral consequence of this dictated transfer price on the manager of Division A?

Section B - Case 3: Quantum Nexus To resolve the conflict between tax optimization and managerial motivation, Quantum Nexus considers implementing a 'Dual Pricing' system. How does a dual pricing system operate in this context?

Section C AquaVitae Foundation is a global Non-Governmental Organization (NGO) dedicated to providing clean drinking water in developing nations. They rely entirely on donor funding. Historically, AquaVitae has struggled to quantify its success. Management has decided to evaluate performance using the 'Value for Money' framework (the 3 Es). Recent project data for the 'Desert Wells' initiative: - Budgeted cost per well: $5,000. Actual cost per well: $4,800. - Budgeted time to dig one well: 14 days. Actual time: 12 days. - Target: Provide clean water to 10,000 villagers. Actual villagers reached: 8,500 (due to several wells drying up faster than anticipated). Furthermore, the Board wants to implement a Balanced Scorecard adapted for Not-For-Profit organizations. Required: (a) Analyze the performance of the 'Desert Wells' initiative using the 3 Es (Economy, Efficiency, Effectiveness). (10 marks) (b) Evaluate how the four perspectives of the traditional Balanced Scorecard must be adapted to suit AquaVitae Foundation, providing one specific KPI for each adapted perspective. (10 marks)

**Section A** The manager of Division X is evaluated based on Return on Investment (ROI). The division currently has an ROI of 18%. The company's cost of capital is 12%. The manager is considering a new project that yields a return of 15%. Which of the following statements is true regarding the manager's likely decision and its alignment with goal congruence?

**Section A** A government-funded public library is evaluating its performance using the 'Value for Money' (3 Es) framework. The library recently negotiated a 10% discount on bulk purchases of new books from publishers. Which of the 3 Es does this achievement primarily demonstrate?

**Section A** In Fitzgerald and Moon's Building Block model for performance measurement in service industries, the 'Standards' block consists of three elements: Ownership, Achievability, and Equity. What does 'Equity' refer to in this context?

**Section B - Case 3: Nordic Components** Nordic Components is a multinational manufacturer. Division A (located in Country X) manufactures electric motors. Division B (located in Country Y) manufactures e-bikes and uses one motor per bike. Division A's variable cost per motor is $50. It currently sells motors to external customers for $80. Division B currently buys identical motors from an external supplier for $75. If Division A has ample spare capacity to meet Division B's needs without losing any external sales, what is the minimum transfer price Division A should accept? (Enter your answer as a whole number, without the $ sign)

**Section B - Case 3: Nordic Components** Nordic Components is a multinational manufacturer. Division A (located in Country X) manufactures electric motors. Division B (located in Country Y) manufactures e-bikes and uses one motor per bike. Division A's variable cost per motor is $50. It currently sells motors to external customers for $80. Division B currently buys identical motors from an external supplier for $75. If Division A is operating at full capacity and cannot meet Division B's needs without diverting units away from external customers, what is the minimum transfer price Division A should accept? (Enter your answer as a whole number, without the $ sign)

**Section B - Case 3: Nordic Components** Nordic Components is a multinational manufacturer. Division A (located in Country X) manufactures electric motors. Division B (located in Country Y) manufactures e-bikes and uses one motor per bike. Division A's variable cost per motor is $50. It currently sells motors to external customers for $80. Division B currently buys identical motors from an external supplier for $75. Regardless of Division A's capacity, what is the MAXIMUM transfer price that Division B will be willing to pay? (Enter your answer as a whole number, without the $ sign)

**Section B - Case 3: Nordic Components** Nordic Components is a multinational manufacturer. Division A (located in Country X) manufactures electric motors. Division B (located in Country Y) manufactures e-bikes and uses one motor per bike. Country X has a corporate tax rate of 15%. Country Y has a corporate tax rate of 30%. Head office wants to set a transfer price that minimizes the overall global tax liability for Nordic Components. Assuming tax authorities allow it, which transfer pricing strategy should Head Office adopt?

**Section B - Case 3: Nordic Components** Nordic Components is a multinational manufacturer. Division A (located in Country X) manufactures electric motors. Division B (located in Country Y) manufactures e-bikes and uses one motor per bike. Division A's variable cost per motor is $50. It currently sells motors to external customers for $80. Division B currently buys identical motors from an external supplier for $75. If Head Office forces Division A to transfer motors to Division B at marginal cost ($50) to ensure Division B remains competitive, which TWO of the following dysfunctional behaviors are likely to occur?

**Section C** CareLogistics is a specialized healthcare logistics company that transports sensitive medical supplies (like organs for transplant and temperature-sensitive vaccines) between hospitals. Historically, the board of directors has evaluated performance solely based on Operating Profit Margin and Return on Capital Employed (ROCE). Recently, the company lost two major hospital contracts due to late deliveries and compromised vaccine temperatures. The CEO wants to implement Kaplan and Norton's Balanced Scorecard to provide a broader view of performance. **Required:** (a) Explain why relying solely on financial metrics like ROCE is inadequate for a company like CareLogistics. (6 marks) (b) For each of the four perspectives of the Balanced Scorecard, suggest ONE specific strategic objective and ONE corresponding measurable Key Performance Indicator (KPI) that would be highly relevant for CareLogistics. Justify your choices. (14 marks)