Question

Evaluating Profit and Investment Center Performance

P 3. Bobbie Howell, the managing partner of the law fi rmHowell, Bagan, and Clark, L LP,

makes asset acquisition and disposal decisions for the fi rm. Asmanaging partner, she

supervises the partners in charge of the fi rm’s th ree branchoffices. Those partners have

the authority to make employee com-

pensation decisions. The partners’ compensation depends on theprofitability of their

branch office. Victoria Smith manages the City Branch, which hasthe following master

budget and actual results for the year:

Master Budget

Actual

Results

Billed hours

5,000

4,900

Revenue

$250,000

$254,800

Controllable variable costs

Direct labor

120,000

137,200

Variable overhead

40,000

34,300

Contribution margin

$90,000

$83,300

Controllable fixed costs

Rent

30,000

30,000

Other administrative expenses

45,000

42,000

Branch operating income

15,000

11,300

Required

1. Assume that the City Branch is a profit center. Prepare aperformance report that

includes a f lexible budget. Determine the variances betweenactual results, the f lexible

budget, and the master budget.

2. Evaluate Victoria Smith’s performance as manager of the CityBranch.

3. Assume that the branch managers are assigned responsibilityfor capital expenditures

and that the branches are thus investment centers. City Branchis expected to generate a

desired ROI of at least 30 percent on average invested assets of$40,000.

a. Compute the branch’s return on investment and residualincome.

b. Manager Insight:Using the ROI and residual income, evaluateVictoria Smith’s

performance as branch manager.