Key Terms
Definition
How many sales dollars are produced by every dollar invested in capital assets. Measures efficiency of asset use.
Controllable factor
Component of the organization for which the manager is responsible and can control.
Uncontrollable factor
An outcome or decision over which the manager has no control.
EXAMPLE
Same machine as RI example. Cost = $1,500,000.
Evaluation metric
Store profitability.
Evaluation metrics
ROI, RI, EVA (covered in Section 4).
Strategic plan
Broad vision of how the company will operate and evolve in the future.
SOLUTION
Combine accounting-based measures with non-accounting measures. Most performance systems today use quantitative AND qual
ROI
Broad divisional comparisons; percentage form useful across different-sized divisions. Can cause goal incongruence when
Capital asset
Tangible or intangible asset with a useful life greater than one year. Also called a fixed asset.
Formula
Sales Margin = Income / Sales
WHY THE DUPONT MODEL MATTERS
When you multiply Sales Margin x Asset Turnover, the sales components cancel:
Gross book value
Historical cost of the asset, not reduced for depreciation. Removes the effect of different depreciation methods.
Fair value (market value)
Used only in special cases such as real estate ROI. Rarely used generally because market value is subjective and often u
Residual income
The amount of income a division or project is expected to earn in excess of the firm's minimum required rate of return.