Blue is the controller at the Acme Shoe Company, a large manufacturing company located in Franklin, Pennsylvania. Acme has many divisions, and the performance of each division has typically been evaluated using a return on investment (ROI) formula. The return on investment is calculated by dividing profit by the book value of total assets.In a meeting yesterday with Bob Burn, the company president, Blue warned that this return on investment measure might not be accurately reflecting how well the divisions are doing. Blue is concerned that by using profits and the book value of assets, division managers might be engaging in some short-term finagling to show the highest possible return. Bob concurred and asked what other numbers they could use to evaluate division performance.Blue said, ‘‘I’m not sure, Bob. Net income is not a good number for evaluation purposes. Because we allocate a lot of overhead costs to the divisions on what some managers consider an arbitrary basis, net income won’t work as a performance measure in place of return on investment.’’Bob told Blue to give some thought to this problem and report back to him.RequirementsExplain what managers can do in the short run to maximize return on investment as calculated at Acme. What other accounting measures could Acme use to evaluate the performance of its divisional managers?Describe other instances in which accounting numbers might lead to dysfunctional behavior in anSearch the Internet and find at least one company that offers an informationsystem (or software) that might help Blue evaluate his company’s performance.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Blue is the controller at the Acme Shoe Company, a large manufacturing company located in Franklin, Pennsylvania. Acme has many divisions, and the performance of each division has typically been evaluated using a return on investment (ROI) formula. The return on investment is calculated by dividing profit by the book value of total assets.In a meeting yesterday with Bob Burn, the company president, Blue warned that this return on investment measure might not be accurately reflecting how well the divisions are doing. Blue is concerned that by using profits and the book value of assets, division managers might be engaging in some short-term finagling to show the highest possible return. Bob concurred and asked what other numbers they could use to evaluate division performance.Blue said, ‘‘I’m not sure, Bob. Net income is not a good number for evaluation purposes. Because we allocate a lot of overhead costs to the divisions on what some managers consider an arbitrary basis, net income won’t work as a performance measure in place of return on investment.’’Bob told Blue to give some thought to this problem and report back to him.RequirementsExplain what managers can do in the short run to maximize return on investment as calculated at Acme. What other accounting measures could Acme use to evaluate the performance of its divisional managers?Describe other instances in which accounting numbers might lead to dysfunctional behavior in anSearch the Internet and find at least one company that offers an informationsystem (or software) that might help Blue evaluate his company’s performance.

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