ECN 104 Lecture Notes - Lecture 2: Balanced Scorecard, Strategic Management, Opportunity Cost
Document Summary
In centralized decision making, decisions are made at the very top level, and lower-level managers are responsible for implementing these decisions. Turnover reveals how many sales dollars result from each dollar invested in operating assets. = operating income/sales and turnover = sales/average operating assets. By breaking roi into margin and turnover, more information is available to assess performance. Increased profitability can be achieved (all else being equal) by increasing revenues, decreasing expenses, or lowering investment: residual income is equal to operating income minus the minimum cost of capital multiplied by the average operating assets. Eva (economic value added) requires the company to calculate its actual cost of capital and use it as the minimum cost of capital in the residual income calculation. Eva always uses after-tax income: yes, residual income and eva can be negative. A second policy is a cost-based price where the transfer price equals some measure of the product"s cost plus a markup above cost.
