Transcript Reporting for Control

Reporting for Control
Chapter Twelve
© 2006 McGraw-Hill Ryerson Ltd.
Learning Objectives
After studying this chapter, you should be able to:
1. Differentiate among responsibility centres such
as cost centres, profit centres, and investment
centres, and explain how performance is
measured in each.
2. Prepare a segmented income statement using
the contribution format, and explain the
difference between traceable fixed costs and
common fixed costs.
3. Analyze variances from sales targets.
© 2006 McGraw-Hill Ryerson Ltd.
Learning Objectives
After studying this chapter, you should be able to:
4. Analyze marketing expenses using cost drivers.
5. Analyze the return on investment (ROI).
6. Compute residual income, and describe the
strengths and weaknesses of this method of
measuring performance.
7. Explain the use of Balanced Scorecards to assess
performance.
8. (Appendix 12A) Determine the range, if any, within
which a negotiated transfer price should fall.
© 2006 McGraw-Hill Ryerson Ltd.
Decentralization in Organizations
Benefits of
Decentralization
Lower-level managers
gain experience in
decision-making.
Lower-level decision
often based on
better information.
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Top management
freed to concentrate
on strategy.
Decision-making
authority leads to
job satisfaction.
Lower level managers
can respond quickly
to customers.
Decentralization in Organizations
Lower-level managers
may make decisions
without seeing the
“big picture.”
Lower-level manager’s
objectives may not
be those of the
organization.
© 2006 McGraw-Hill Ryerson Ltd.
May be a lack of
coordination among
autonomous
managers.
Disadvantages of
Decentralization
May be difficult to
spread innovative ideas
in the organization.
Cost, Profit, and Investments Centres
Cost
Centre
Cost, profit,
and investment
centres are all
known as
responsibility
centres.
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Profit
Centre
Responsibility
Centre
Investment
Centre
Cost, Profit, and Investments Centres
Cost Centre
A segment whose
manager has control
over costs,
but not over revenues
or investment funds.
© 2006 McGraw-Hill Ryerson Ltd.
Cost, Profit, and Investments Centres
Profit Centre
A segment whose
manager has control
over both costs and
revenues,
but no control over
investment funds.
Revenues
Sales
Interest
Other
Costs
Mfg. costs
Commissions
Salaries
Other
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Cost, Profit, and Investments Centres
Corporate Headquarters
Investment Centre
A segment whose
manager has control
over costs, revenues,
and investments in
operating assets.
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Responsibility Centres
Investment
Centres
Operations
Vice President
Salty Snacks
Product Manger
Beverages
Product Manager
Bottling Plant
Manager
Warehouse
Manager
Superior Foods Corporation
Corporate Headquarters
President and CEO
Finance
Chief FInancial Officer
Legal
General Counsel
Personnel
Vice President
Confections
Product Manager
Distribution
Manager
Cost
Centres
Superior Foods Corporation provides an example of the
various kinds of responsibility centres that exist in an
organization.
© 2006 McGraw-Hill Ryerson Ltd.
Responsibility Centres
Superior Foods Corporation
Corporate Headquarters
President and CEO
Operations
Vice President
Salty Snacks
Product Manger
Beverages
Product Manager
Bottling Plant
Manager
Warehouse
Manager
Finance
Chief FInancial Officer
Legal
General Counsel
Personnel
Vice President
Confections
Product Manager
Distribution
Manager
Profit
Centres
Superior Foods Corporation provides an example of the
various kinds of responsibility centres that exist in an
organization.
© 2006 McGraw-Hill Ryerson Ltd.
Responsibility Centres
Superior Foods Corporation
Corporate Headquarters
President and CEO
Operations
Vice President
Salty Snacks
Product Manger
Beverages
Product Manager
Bottling Plant
Manager
Warehouse
Manager
Finance
Chief FInancial Officer
Legal
General Counsel
Personnel
Vice President
Confections
Product Manager
Distribution
Manager
Cost
Centres
Superior Foods Corporation provides an example of the
various kinds of responsibility centres that exist in an
organization.
© 2006 McGraw-Hill Ryerson Ltd.
Decentralization and Segment Reporting
A segment is any part
or activity of an
organization about
which a manager
seeks cost, revenue,
or profit data. A
segment can be . . .
An Individual Store
Quick Mart
A Sales Territory
A Service Centre
© 2006 McGraw-Hill Ryerson Ltd.
Superior Foods: Geographic Regions
Superior Foods Corporation
$500,000,000
Central
$75,000,000
Newfoundland
$120,000,000
Atlantic
$300,000,000
Nova Scotia
$45,000,000
Prairie
$70,000,000
New Brunswick
$85,0000,000
West Coast
$55,000,000
Prince Edward Island
$50,000,000
Superior Foods Corporation could segment its business
by geographic regions.
© 2006 McGraw-Hill Ryerson Ltd.
Superior Foods: Customer Channel
Superior Foods Corporation
$500,000,000
Convenience Stores
$80,000,000
Supermarket Chain A
$85,000,000
Supermarket Chains
$280,000,000
Supermarket Chain B
$65,000,000
Wholesale Distributors
$100,000,000
Supermarket Chain C
$90,000,000
Drugstores
$40,000,000
Supermarket Chain D
$40,000,000
Superior Foods Corporation could segment its business
by customer channel.
© 2006 McGraw-Hill Ryerson Ltd.
Keys to Segmented Income Statements
There are two keys to building
segmented income statements:
A contribution format should be used because it
separates fixed from variable costs and it
enables the calculation of a contribution margin.
Traceable fixed costs should be separated from
common fixed costs to enable the calculation of
a segment margin.
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Identifying Traceable Fixed Costs
Traceable costs arise because of the existence of a
particular segment and would disappear over time if
the segment itself disappeared.
No computer
division means . . .
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No computer
division manager.
Identifying Common Fixed Costs
Common costs arise because of the overall
operation of the company and would not disappear
if any particular segment were eliminated.
No computer
division but . . .
© 2006 McGraw-Hill Ryerson Ltd.
We still have a
company president.
Traceable Costs Can Become
Common Costs
It is important to realize that the traceable
fixed costs of one segment may be a
common fixed cost of another segment.
For example, the landing fee
paid to land an airplane at an
airport is traceable to the
particular flight, but it is not
traceable to first-class,
business-class, and
economy-class passengers.
© 2006 McGraw-Hill Ryerson Ltd.
Segment Margin
Profits
The segment margin, which is computed by
subtracting the traceable fixed costs of a
segment from its contribution margin, is the best
gauge of the long-run profitability of a segment.
Time
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Traceable and Common Costs
Fixed
Costs
Traceable
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Don’t allocate
common costs to
segments.
Common
Activity-Based Costing
Activity-based costing can help identify how costs
shared by more than one segment are traceable to
individual segments.
Assume that three products, 9-inch, 12-inch, and 18-inch pipe, share 10,000
square feet of warehousing space, which is leased at a price of $4 per square
foot.
If the 9-inch, 12-inch, and 18-inch pipes occupy 1,000, 4,000, and 5,000 square
feet, respectively, then ABC can be used to trace the warehousing costs to the
three products as shown.
Pipe Products
9-inch
12-inch
18-inch
Total
Warehouse sq. ft.
1,000
4,000
5,000
10,000
Lease price per sq. ft. $
4 $
4 $
4 $
4
Total lease cost
$
4,000 $
16,000 $
20,000 $
40,000
© 2006 McGraw-Hill Ryerson Ltd.
Levels of Segmented Statements
Webber, Inc. has two divisions.
Webber, Inc.
Computer Division
Television Division
Let’s look more closely at the Television
Division’s income statement.
© 2006 McGraw-Hill Ryerson Ltd.
Levels of Segmented Statements
Our approach to segment reporting uses the
contribution format.
Income Statement
Contribution Margin Format
Television Division
Sales
$ 300,000
Variable COGS
120,000
Other variable costs
30,000
Total variable costs
150,000
Contribution margin
150,000
Traceable fixed costs
90,000
Division margin
$ 60,000
© 2006 McGraw-Hill Ryerson Ltd.
Cost of goods
sold consists of
variable
manufacturing
costs.
Fixed and
variable costs
are listed in
separate
sections.
Levels of Segmented Statements
Our approach to segment reporting uses the
contribution format.
Income Statement
Contribution Margin Format
Television Division
Sales
$ 300,000
Variable COGS
120,000
Other variable costs
30,000
Total variable costs
150,000
Contribution margin
150,000
Traceable fixed costs
90,000
Division margin
$ 60,000
© 2006 McGraw-Hill Ryerson Ltd.
Contribution margin
is computed by
taking sales minus
variable costs.
Segment margin
is Television’s
contribution
to profits.
Levels of Segmented Statements
Sales
Variable costs
CM
Traceable FC
Division margin
Common costs
Net operating
income
© 2006 McGraw-Hill Ryerson Ltd.
Income Statement
Company
Television
$ 500,000
$ 300,000
230,000
150,000
270,000
150,000
170,000
90,000
100,000
$ 60,000
Computer
$ 200,000
80,000
120,000
80,000
$ 40,000
Levels of Segmented Statements
Sales
Variable costs
CM
Traceable FC
Division margin
Common costs
Net operating
income
© 2006 McGraw-Hill Ryerson Ltd.
Income Statement
Company
Television
$ 500,000
$ 300,000
230,000
150,000
270,000
150,000
170,000
90,000
100,000
$ 60,000
25,000
$
Computer
$ 200,000
80,000
120,000
80,000
$ 40,000
Common costs should not
be allocated to the
75,000
divisions. These costs
would remain even if one
of the divisions were
eliminated.
Traceable Costs Can Become Common Costs
As previously mentioned, fixed costs that are
traceable to one segment can become common
if the company is divided into smaller segments.
Let’s see how this works
using the Webber Inc.
example!
© 2006 McGraw-Hill Ryerson Ltd.
Traceable Costs Can Become Common Costs
Webber’s Television Division
Television
Division
Regular
Big Screen
Product
Lines
© 2006 McGraw-Hill Ryerson Ltd.
Traceable Costs Can Become Common Costs
Income Statement
Television
Division
Regular
Sales
$ 200,000
Variable costs
95,000
CM
105,000
Traceable FC
45,000
Product line margin
$ 60,000
Common costs
Divisional margin
Big Screen
$ 100,000
55,000
45,000
35,000
$ 10,000
We obtained the following information from
the Regular and Big Screen segments.
© 2006 McGraw-Hill Ryerson Ltd.
Traceable Costs Can Become Common Costs
Income Statement
Television
Division
Regular
Sales
$ 300,000
$ 200,000
Variable costs
150,000
95,000
CM
150,000
105,000
Traceable FC
80,000
45,000
Product line margin
70,000
$ 60,000
Common costs
10,000
Divisional margin
$ 60,000
Big Screen
$ 100,000
55,000
45,000
35,000
$ 10,000
Fixed costs directly traced
to the Television Division
$80,000 + $10,000 = $90,000
© 2006 McGraw-Hill Ryerson Ltd.
External Reports
The CICA Handbook now requires that public enterprises
that have publicly traded debt or equity include
segmented financial data in their annual reports.
1.
Companies must report segmented
results to shareholders using the same
methods that are used for internal
segmented reports.
2.
Though the contribution approach to
segment reporting does comply with
GAAP, most companies choose to
construct their segmented financial
statements using the more commonly
used absorption approach.
© 2006 McGraw-Hill Ryerson Ltd.
Hindrances to Proper Cost Assignment
Three Problems
Omission of some
costs in the
assignment process.
Assignment to segments
of costs that are
really common costs of
the entire organization.
Use of inappropriate
methods for allocating
costs among segments.
© 2006 McGraw-Hill Ryerson Ltd.
Omission of Costs
Costs assigned to a segment should include all
costs attributable to that segment from the
company’s entire value chain.
Business Functions
Making Up The
Value Chain
R&D
Product
Design
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Customer
Manufacturing Marketing Distribution Service
Inappropriate Methods of Allocating Costs Among
Segments
Failure to trace
costs directly
Segment
1
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Segment
2
Inappropriate
allocation base
Segment
3
Segment
4
Common Costs and Segments
Common costs should not be arbitrarily allocated to segments
based on the rationale that “someone has to cover the
common costs” for two reasons:
1. This practice may make a profitable business segment appear
to be unprofitable.
2. Allocating common fixed costs forces managers to be held
accountable for costs they cannot control.
Segment
1
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Segment
2
Segment
3
Segment
4
Allocations of Common Costs
Sales
Variable costs
CM
Traceable FC
Segment margin
Common costs
Profit
Income Statement
Haglund's
Bar
Lakeshore
$ 100,000
$ 800,000
60,000
310,000
40,000
490,000
26,000
246,000
$ 14,000
244,000
200,000
$ 44,000
Restaurant
$ 700,000
250,000
450,000
220,000
$ 230,000
Assume that Haglund’s Lakeshore prepared the
segmented income statement as shown.
© 2006 McGraw-Hill Ryerson Ltd.
Quick Check 
How much of the common fixed cost of $200,000
can be avoided by eliminating the bar?
a. None of it.
b. Some of it.
c. All of it.
© 2006 McGraw-Hill Ryerson Ltd.
Quick Check 
How much of the common fixed cost of $200,000
can be avoided by eliminating the bar?
a. None of it.
b. Some of it.
c. All of it.
A common fixed cost cannot be
eliminated by dropping one of
the segments.
© 2006 McGraw-Hill Ryerson Ltd.
Quick Check 
Suppose square feet is used as the basis for
allocating the common fixed cost of $200,000. How
much would be allocated to the bar if the bar
occupies 1,000 square feet and the restaurant
9,000 square feet?
a. $20,000
b. $30,000
c. $40,000
d. $50,000
© 2006 McGraw-Hill Ryerson Ltd.
Quick Check 
Suppose square feet is used as the basis for
allocating the common fixed cost of $200,000. How
much would be allocated to the bar if the bar
occupies 1,000 square feet and the restaurant
9,000 square feet?
a. $20,000
The bar would be allocated
b. $30,000
1/10 of the cost or $20,000.
c. $40,000
d. $50,000
© 2006 McGraw-Hill Ryerson Ltd.
Quick Check 
If Haglund’s allocates its common
costs to the bar and the restaurant,
what would be the reported profit of
each segment?
© 2006 McGraw-Hill Ryerson Ltd.
Allocations of Common Costs
Sales
Variable costs
CM
Traceable FC
Segment margin
Common costs
Profit
Income Statement
Haglund's
Lakeshore
Bar
$ 800,000
$ 100,000
310,000
60,000
490,000
40,000
246,000
26,000
244,000
14,000
200,000
20,000
$ 44,000
$
(6,000)
Restaurant
$ 700,000
250,000
450,000
220,000
230,000
180,000
$ 50,000
Hurray, now everything adds up!!!
© 2006 McGraw-Hill Ryerson Ltd.
Quick Check 
Should the bar be eliminated?
a. Yes
b. No
© 2006 McGraw-Hill Ryerson Ltd.
Quick Check 
Should the bar be eliminated?
a. Yes
The profit was $44,000 before
b. No
eliminating the bar. If we eliminate
Sales
Variable costs
CM
Traceable FC
Segment margin
Common costs
Profit
© 2006 McGraw-Hill Ryerson Ltd.
the bar,
profit drops to $30,000!
Income
Statement
Haglund's
Lakeshore
Bar
Restaurant
$ 700,000
$ 700,000
250,000
250,000
450,000
450,000
220,000
220,000
230,000
230,000
200,000
200,000
$ 30,000
$ 30,000
Sales Variance Analysis
Consider the following example for CardCo:
Sales in units
Deluxe cards
Standard cards
Price per unit
Deluxe cards
Standard cards
Market volume
Deluxe cards
Standard cards
Variable cost per unit
Deluxe cards
Standard cards
© 2006 McGraw-Hill Ryerson Ltd.
Budget
Actual
14,000
6,000
17,000
5,000
$18
$ 9
$16
$10
75,000
95,000
85,000
90,000
$ 8
$ 3
$ 8
$ 3
Sales Variance Analysis
CardCo Actual and Budgeted Results
Actual Results
Revenue:
Deluxe
Standard
(17,000x16) $ 272,000
(5,000x10)
50,000
322,000
Variable expenses:
Deluxe
(17,000x8)
136,000
Standard
(5,000x3)
15,000
151,000
Contribution margin
$ 171,000
© 2006 McGraw-Hill Ryerson Ltd.
Flexible Budget
Master Budget
Actual results are based on
the actual quantity sold
multiplied by the actual selling
price
or
variable cost
Sales Variance Analysis
CardCo Actual and Budgeted Results
Actual Results
Flexible Budget
Revenue:
Deluxe
Standard
(17,000x16) $ 272,000 (17,000x18) $ 306,000
(5,000x10)
50,000
(5,000x9)
45,000
322,000
351,000
Variable expenses:
Deluxe
(17,000x8)
136,000 (17,000x8)
136,000
Standard
(5,000x3)
15,000
(5,000x3)
15,000
151,000
151,000
Contribution
marginbudget
$ 171,000
$ 200,000
Flexible
results are
based on the actual quantity
sold multiplied by the budgeted
selling price
or
variable cost
© 2006 McGraw-Hill Ryerson Ltd.
Master Budget
Sales Variance Analysis
CardCo Actual and Budgeted Results
Actual Results
Revenue:
Deluxe
Standard
Flexible Budget
Master Budget
(17,000x16) $ 272,000 (17,000x18) $ 306,000 (14,000x18) $
(5,000x10)
50,000
(5,000x9)
45,000
(6,000x9)
322,000
351,000
Variable expenses:
Deluxe
(17,000x8)
136,000 (17,000x8)
136,000 (14,000x8)
Standardbudget
(5,000x3)
15,000
(5,000x3)
15,000
(6,000x3)
Master
results are
based
151,000
151,000
on
the
budgeted
quantity
sold
Contribution margin
$ 171,000
$ 200,000
$
multiplied by the budgeted
selling price
or
variable cost
© 2006 McGraw-Hill Ryerson Ltd.
252,000
54,000
306,000
112,000
18,000
130,000
176,000
Sales Variance Analysis
CardCo Actual and Budgeted Results
Actual Results
Revenue:
Deluxe
Standard
Flexible Budget
(17,000x16) $ 272,000 (17,000x18) $
(5,000x10)
50,000
(5,000x9)
322,000
Variable expenses:
Deluxe
(17,000x8)
136,000 (17,000x8)
Standard
(5,000x3)
15,000
(5,000x3)
151,000
Contribution margin
$ 171,000
$
306,000 (14,000x18) $ 252,000
45,000 (6,000x9)
54,000
351,000
306,000
136,000
15,000
151,000
200,000
Sales Price Variance
$29,000 U
© 2006 McGraw-Hill Ryerson Ltd.
Master Budget
(14,000x8)
(6,000x3)
112,000
18,000
130,000
$ 176,000
Sales Variance Analysis
CardCo Actual and Budgeted Results
Actual Results
Revenue:
Deluxe
Standard
Flexible Budget
(17,000x16) $ 272,000 (17,000x18) $
(5,000x10)
50,000
(5,000x9)
322,000
$29,000U
Variable expenses:
Deluxe
(17,000x8)
136,000 (17,000x8)
Standard
(5,000x3)
15,000
(5,000x3)
151,000
Contribution margin
$ 171,000
$
Master Budget
306,000 (14,000x18) $ 252,000
45,000 (6,000x9)
54,000
351,000
306,000
136,000
15,000
151,000
200,000
(14,000x8)
(6,000x3)
112,000
18,000
130,000
$ 176,000
or
Sales Price Variance=(Actual - Budgeted price)x Actual sales volume
Deluxe =($16-$18) x 17,000 units = $34,000 U
Standard =($10-$9) x 5,000 units = $ 5,000 F
Total sales price variance
= $29,000 U
© 2006 McGraw-Hill Ryerson Ltd.
Sales Variance Analysis
CardCo Actual and Budgeted Results
Actual Results
Revenue:
Deluxe
Standard
Flexible Budget
(17,000x16) $ 272,000 (17,000x18) $
(5,000x10)
50,000
(5,000x9)
322,000
Variable expenses:
Deluxe
(17,000x8)
136,000 (17,000x8)
Standard
(5,000x3)
15,000
(5,000x3)
151,000
Contribution margin
$ 171,000
$
Master Budget
306,000 (14,000x18) $ 252,000
45,000 (6,000x9)
54,000
351,000
306,000
136,000
15,000
151,000
200,000
(14,000x8)
(6,000x3)
112,000
18,000
130,000
$ 176,000
Sales Volume Variance
$24,000 F
© 2006 McGraw-Hill Ryerson Ltd.
Sales Variance Analysis
CardCo Actual and Budgeted Results
Actual Results
Revenue:
Deluxe
Standard
Flexible Budget
(17,000x16) $ 272,000 (17,000x18) $
(5,000x10)
50,000
(5,000x9)
322,000
Variable expenses:
Deluxe
(17,000x8)
136,000 (17,000x8)
Standard
(5,000x3)
15,000
(5,000x3)
151,000
Contribution margin
$ 171,000
$
Master Budget
306,000 (14,000x18) $ 252,000
45,000 (6,000x9)
54,000
351,000
306,000
136,000
15,000
151,000
200,000
(14,000x8)
(6,000x3)
112,000
18,000
130,000
$ 176,000
$24,000F
or
Sales Volume Variance=(Actual - Budgeted quantity) x Budgeted CM
Deluxe =(17,000-14,000) x ($18-$8) units = $30,000 F
Standard =(5,000-6,000) x ($9-$3) = $ 6,000 U
Total sales volume variance = $24,000 F
© 2006 McGraw-Hill Ryerson Ltd.
Sales Variance Analysis
The Sales Volume Variance can further be broken
down into the:
 Market Volume Variance
=
{
Actual
market
volume
-
}
Budget
market
volume
Expected
Budgeted
x market x CM per
share %
unit
 Market Share Variance
=
[ {
Actual
sales
quantity
© 2006 McGraw-Hill Ryerson Ltd.
-
Actual
market
share
-
}]
Expected
market
share
Budgeted
x CM per
unit
Sales Variance Analysis
For CardCo, the Sales Volume Variance of $24,000 F
breakdown further as follows:
 Market Volume Variance
Deluxe=(85,000-75,000) x (14,000/75,000) x (18-8) = 18,667 F
Standard=(90,000-95,000) x (6,000/95,000) x (9-3) = 1,895 U
Total Market Volume Variance
(1) 16,772 F
 Market Share Variance
Deluxe=[17,000-(85,000 x 14,000/75,000)] x (18-8) = 11,333 F
Standard=[5,000-(90,000 x 6,000/95,000)] x (9-3) = 4,105 U
Total Market Share Variance
Sales Volume Variance = (1) + (2) =
© 2006 McGraw-Hill Ryerson Ltd.
(2) 7,228 F
24,000 F
Sales Variance Analysis
The Sales Volume Variance can also be broken down
into the:
 Sales Mix Variance
{
}
Actual sales
Actual sales - quantity at
quantity expected sales
mix
=
x Budgeted CM
per unit
 Sales Quantity Variance
=
{
© 2006 McGraw-Hill Ryerson Ltd.
Actual sales
quantity at
expected sales
mix
-
}
Anticipated
sales quantity
x Budgeted CM
per unit
Sales Variance Analysis
For CardCo, the Sales Volume Variance of $24,000F
is made up of:
 Sales Mix Variance
Deluxe=[17,000-(22,000 x14/20)] x (18-8)
Standard=[(5,000-22,000 x 6/20)] x (9-3)
Total Sales Mix Variance
=16,000 F
= 9,600 U
(1) 6,400 F
 Sales Quantity Variance
Deluxe=[(22,000 x 14/20)-14,000] x (18-8)
Standard=[(22,000 x 6/20)-6,000] x (9-3)
Total Sales Quantity Variance
=14,000 F
= 3,600 F
(2) 17,600F
Sales Volume Variance = (1) + (2) = 24,000F
© 2006 McGraw-Hill Ryerson Ltd.
Costs factors to consider in marketing strategy:
Transport
Warehousing
Marketing Strategy
Advertising
Selling
Credit
© 2006 McGraw-Hill Ryerson Ltd.
Order Getting and Order Filling
More Discretionary
Order Getting
Advertising
Selling Commissions
Travel
Order Filling
Warehousing
© 2006 McGraw-Hill Ryerson Ltd.
Transportation
Packing
Credit
Return on Investment (ROI) Formula
Income before interest
and taxes (EBIT)
Operating income
ROI =
Average operating assets
Cash, accounts receivable, inventory,
plant and equipment, and other
productive assets.
© 2006 McGraw-Hill Ryerson Ltd.
Net Book Value vs. Gross Cost
Most companies use the net book value of
depreciable assets to calculate average
operating assets.
Acquisition cost
Less: Accumulated depreciation
Net book value
© 2006 McGraw-Hill Ryerson Ltd.
Return on Investment (ROI) Formula
Operating income
ROI =
Average operating assets
Margin =
Operating income
Sales
Sales
Turnover =
Average operating assets
ROI = Margin  Turnover
© 2006 McGraw-Hill Ryerson Ltd.
Increasing ROI
There are three ways to increase ROI . . .
Increase
Sales
© 2006 McGraw-Hill Ryerson Ltd.
Reduce
Expenses
Reduce
Assets
Increasing ROI – An Example
Regal Company reports the following:
Operating income
Average operating assets
Sales
Operating expenses
$ 30,000
$ 200,000
$ 500,000
$ 470,000
What is Regal Company’s ROI?
ROI = Margin  Turnover
ROI =
© 2006 McGraw-Hill Ryerson Ltd.
Operating income
Sales
×
Sales
Average operating assets
Increasing ROI – An Example
ROI = Margin  Turnover
Operating income
Sales
ROI =
$30,000
ROI =
$500,000
×
×
ROI = 6%  2.5 = 15%
© 2006 McGraw-Hill Ryerson Ltd.
Sales
Average operating assets
$500,000
$200,000
Increasing Sales Without an Increase in
Operating Assets
• Regal’s manager was able to increase sales to
$600,000 while operating expenses increased to
$558,000.
• Regal’s operating income increased to $42,000.
• There was no change in the average operating
assets of the segment.
Let’s calculate the new ROI.
© 2006 McGraw-Hill Ryerson Ltd.
Increasing Sales Without an Increase in
Operating Assets
ROI = Margin  Turnover
Operating income
Sales
ROI =
ROI = $42,000
$600,000
×
×
Sales
Average operating assets
$600,000
$200,000
ROI = 7%  3.0 = 21%
ROI increased from 15% to 21%.
© 2006 McGraw-Hill Ryerson Ltd.
Decreasing Operating Expenses with
no Change in Sales or Operating Assets
Assume that Regal’s manager was able to reduce
operating expenses by $10,000 without affecting
sales or operating assets. This would increase
operating income to $40,000.
Regal Company reports the following:
Operating income
Average operating assets
Sales
Operating expenses
$ 40,000
$ 200,000
$ 500,000
$ 460,000
Let’s calculate the new ROI.
© 2006 McGraw-Hill Ryerson Ltd.
Decreasing Operating Expenses with
no Change in Sales or Operating Assets
ROI = Margin  Turnover
Operating income
Sales
ROI =
ROI = $40,000
$500,000
×
×
Sales
Average operating assets
$500,000
$200,000
ROI = 8%  2.5 = 20%
ROI increased from 15% to 20%.
© 2006 McGraw-Hill Ryerson Ltd.
Decreasing Operating Assets with no
Change in Sales or Operating Expenses
Assume that Regal’s manager was able to reduce
inventories by $20,000 using just-in-time
techniques without affecting sales or operating
expenses.
Regal Company reports the following:
Operating income
Average operating assets
Sales
Operating expenses
$ 30,000
$ 180,000
$ 500,000
$ 470,000
Let’s calculate the new ROI.
© 2006 McGraw-Hill Ryerson Ltd.
Decreasing Operating Assets with no
Change in Sales or Operating Expenses
ROI = Margin  Turnover
Operating income
Sales
ROI =
ROI = $30,000
$500,000
×
×
Sales
Average operating assets
$500,000
$180,000
ROI = 6%  2.77 = 16.7%
ROI increased from 15% to 16.7%.
© 2006 McGraw-Hill Ryerson Ltd.
Investing in Operating Assets to
Increase Sales
Assume that Regal’s manager invests in a
$30,000 piece of equipment that increases sales
by $35,000 while increasing operating expenses
by $15,000.
Regal Company reports the following:
Operating income
Average operating assets
Sales
Operating expenses
$ 50,000
$ 230,000
$ 535,000
$ 485,000
Let’s calculate the new ROI.
© 2006 McGraw-Hill Ryerson Ltd.
Investing in Operating Assets to
Increase Sales
ROI = Margin  Turnover
Operating income
Sales
ROI =
ROI = $50,000
$535,000
×
×
Sales
Average operating assets
$535,000
$230,000
ROI = 9.35%  2.33 = 21.8%
ROI increased from 15% to 21.8%.
© 2006 McGraw-Hill Ryerson Ltd.
Criticisms of ROI
Management may
not know how to increase ROI.
Managers often inherit many
committed costs over which
they have no control.
Managers evaluated on ROI
may reject profitable
investment opportunities.
© 2006 McGraw-Hill Ryerson Ltd.
Residual Income - Another Measure of
Performance
Operating income
above some minimum
return on operating
assets
© 2006 McGraw-Hill Ryerson Ltd.
Calculating Residual Income
Residual
=
income
Operating
income
(
Average
operating
assets

)
Minimum
required rate of
return
This computation differs from ROI.
ROI measures operating income earned relative to
the investment in average operating assets.
Residual income measures operating income earned
less the minimum required return on average
operating assets.
© 2006 McGraw-Hill Ryerson Ltd.
Residual Income – An Example
• The Retail Division of Zepher, Inc. has average
operating assets of $100,000 and is required to
earn a return of 20% on these assets.
• In the current period the division earns $30,000.
Let’s calculate residual income.
© 2006 McGraw-Hill Ryerson Ltd.
Residual Income – An Example
Operating assets
$ 100,000
Required rate of return ×
20%
Minimum required return $ 20,000
Actual income
Minimum required return
Residual income
© 2006 McGraw-Hill Ryerson Ltd.
$ 30,000
(20,000)
$ 10,000
Motivation and Residual Income
Residual income encourages managers to
make profitable investments that would
be rejected by managers using ROI.
© 2006 McGraw-Hill Ryerson Ltd.
Quick Check 
Redmond Awnings, a division of Wrapup
Corp., has an operating income of $60,000
and average operating assets of $300,000.
The required rate of return for the company
is 15%. What is the division’s ROI?
a. 25%
b. 5%
c. 15%
d. 20%
© 2006 McGraw-Hill Ryerson Ltd.
Quick Check 
Redmond Awnings, a division of Wrapup
Corp., has an operating income of $60,000
and average operating assets of $300,000.
The required rate of return for the company
is 15%. What is the division’s ROI?
a. 25% ROI = NOI/Average operating assets
b. 5%
= $60,000/$300,000 = 20%
c. 15%
d. 20%
© 2006 McGraw-Hill Ryerson Ltd.
Quick Check 
Redmond Awnings, a division of Wrapup Corp., has
an operating income of $60,000 and average
operating assets of $300,000. If the manager of the
division is evaluated based on ROI, will she want to
make an investment of $100,000 that would
generate additional operating income of $18,000
per year?
a. Yes
b. No
© 2006 McGraw-Hill Ryerson Ltd.
Quick Check 
Redmond Awnings, a division of Wrapup Corp., has
an operating income of $60,000 and average
operating assets of $300,000. If the manager of the
division is evaluated based on ROI, will she want to
make an investment of $100,000 that would
generate additional operating income of $18,000
per year?
a. Yes
ROI = $78,000/$400,000 = 19.5%
b. No
This lowers the division’s ROI from
20.0% down to 19.5%.
© 2006 McGraw-Hill Ryerson Ltd.
Quick Check 
The company’s required rate of return is 15%.
Would the company want the manager of the
Redmond Awnings division to make an investment
of $100,000 that would generate additional
operating income of $18,000 per year?
a. Yes
b. No
© 2006 McGraw-Hill Ryerson Ltd.
Quick Check 
The company’s required rate of return is 15%.
Would the company want the manager of the
Redmond Awnings division to make an investment
of $100,000 that would generate additional
operating income of $18,000 per year?
a. Yes
ROI = $18,000/$100,000 = 18%
b. No
The return on the investment exceeds
the minimum required rate of return.
© 2006 McGraw-Hill Ryerson Ltd.
Quick Check 
Redmond Awnings, a division of Wrapup
Corp., has an operating income of $60,000
and average operating assets of $300,000.
The required rate of return for the company
is 15%. What is the division’s residual
income?
a. $240,000
b. $ 45,000
c. $ 15,000
d. $ 51,000
© 2006 McGraw-Hill Ryerson Ltd.
Quick Check 
Redmond Awnings, a division of Wrapup
Corp., has an operating income of $60,000
and average operating assets of $300,000.
The required rate of return for the company
is 15%. What is the division’s residual
income?
a. $240,000
b. $ 45,000 Operating income
$60,000
return (15% of $300,000)
$45,000
c. $ 15,000 Required
Residual income
$15,000
d. $ 51,000
© 2006 McGraw-Hill Ryerson Ltd.
Quick Check 
If the manager of the Redmond Awnings division is
evaluated based on residual income, will she want
to make an investment of $100,000 that would
generate additional operating income of $18,000
per year?
a. Yes
b. No
© 2006 McGraw-Hill Ryerson Ltd.
Quick Check 
If the manager of the Redmond Awnings division is
evaluated based on residual income, will she want
to make an investment of $100,000 that would
generate additional operating income of $18,000
per year?
a. Yes
Operating income
$78,000
b. No Required return (15% of $400,000) $60,000
Residual income
$18,000
This is an increase of $3,000 in the residual
income.
© 2006 McGraw-Hill Ryerson Ltd.
Divisional Comparisons and Residual
Income
The residual
income approach
has one major
disadvantage.
It cannot be used to
compare
performance of
divisions of
different sizes.
© 2006 McGraw-Hill Ryerson Ltd.
Zepher, Inc. - Continued
Recall the following
information for the Retail
Division of Zepher, Inc.
Assume the following
information for the Wholesale
Division of Zepher, Inc.
Retail
Wholesale
Operating assets
$ 100,000 $ 1,000,000
Required rate of return ×
20%
20%
Minimum required return $ 20,000 $ 200,000
Retail
Wholesale
Actual income
$ 30,000 $ 220,000
Minimum required return
(20,000)
(200,000)
Residual income
$ 10,000 $
20,000
© 2006 McGraw-Hill Ryerson Ltd.
Zepher, Inc. - Continued
The residual income numbers suggest that the Wholesale Division outperformed
the Retail Division because its residual income is $10,000 higher. However, the
Retail Division earned an ROI of 30% compared to an ROI of 22% for the
Wholesale Division. The Wholesale Division’s residual income is larger than the
Retail Division simply because it is a bigger division.
Retail
Wholesale
Operating assets
$ 100,000 $ 1,000,000
Required rate of return ×
20%
20%
Minimum required return $ 20,000 $ 200,000
Retail
Wholesale
Actual income
$ 30,000 $ 220,000
Minimum required return
(20,000)
(200,000)
Residual income
$ 10,000 $
20,000
© 2006 McGraw-Hill Ryerson Ltd.
The Balanced Scorecard
Management translates its strategy into
performance measures that employees
understand and accept.
Customers
Financial
Performance
measures
Internal
business
processes
© 2006 McGraw-Hill Ryerson Ltd.
Learning
and growth
The Balanced Scorecard: From
Strategy to Performance Measures
Exh.
10-11
Performance Measures
Financial
Has our financial
performance improved?
Customer
Do customers recognize that
we are delivering more value?
Internal Business Processes
Have we improved key business
processes so that we can deliver
more value to customers?
Learning and Growth
Are we maintaining our ability
to change and improve?
© 2006 McGraw-Hill Ryerson Ltd.
What are our
financial goals?
What customers do
we want to serve and
how are we going to
win and retain them?
What internal business processes are
critical to providing
value to customers?
Vision
and
Strategy
The Balanced Scorecard:
Non-financial Measures
The balanced scorecard relies on non-financial measures
in addition to financial measures for two reasons:
 Financial measures are lag indicators that summarize
the results of past actions. Non-financial measures are
leading indicators of future financial performance.
 Top managers are ordinarily responsible for financial
performance measures – not lower level managers.
Non-financial measures are more likely to be
understood and controlled by lower level managers.
© 2006 McGraw-Hill Ryerson Ltd.
The Balanced Scorecard for Individuals
The entire organization
should have an overall
balanced scorecard.
Each individual should
have a personal
balanced scorecard.
A personal scorecard should contain measures that can be
influenced by the individual being evaluated and that
support the measures in the overall balanced scorecard.
© 2006 McGraw-Hill Ryerson Ltd.
The Balanced Scorecard
A balanced scorecard should have measures
that are linked together on a cause-and-effect basis.
If we improve
one performance
measure . . .
Then
Another desired
performance measure
will improve.
The balanced scorecard lays out concrete
actions to attain desired outcomes.
© 2006 McGraw-Hill Ryerson Ltd.
The Balanced Scorecard
and Compensation
Incentive compensation
should be linked to
balanced scorecard
performance measures.
© 2006 McGraw-Hill Ryerson Ltd.
The Balanced Scorecard
Jaguar Example
Profit
Financial
Contribution per car
Number of cars sold
Customer
Customer satisfaction
with options
Internal
Business
Processes
Learning
and Growth
© 2006 McGraw-Hill Ryerson Ltd.
Number of
options available
Time to
install option
Employee skills in
installing options
Exh.
10-13
The Balanced Scorecard
Jaguar Example
Profit
Contribution per car
Number of cars sold
Customer satisfaction
with options
Results
Satisfaction
Increases
Strategies
Increase
Options
Increase
Skills
© 2006 McGraw-Hill Ryerson Ltd.
Number of
options available
Time to
install option
Employee skills in
installing options
Time
Decreases
The Balanced Scorecard
Jaguar Example
Profit
Contribution per car
Results
Number of cars sold
Customer satisfaction
with options
Strategies
Increase
Options
Number of
options available
Time to
install option
Employee skills in
installing options
© 2006 McGraw-Hill Ryerson Ltd.
Cars sold
Increase
Satisfaction
Increases
The Balanced Scorecard
Jaguar Example
Results
Profit
Contribution per car
Contribution
Increases
Number of cars sold
Customer satisfaction
with options
Number of
options available
Time to
install option
Strategies
Increase
Skills
© 2006 McGraw-Hill Ryerson Ltd.
Employee skills in
installing options
Time
Decreases
The Balanced Scorecard
Jaguar Example
Results
Profit
If number
of cars sold
and contribution
per car increase,
profits
increase.
Profits
Increase
Contribution per car
Contribution
Increases
Number of cars sold
Customer satisfaction
with options
Satisfaction
Increases
Strategies
Increase
Options
Increase
Skills
© 2006 McGraw-Hill Ryerson Ltd.
Number of
options available
Time to
install option
Employee skills in
installing options
Time
Decreases
Advantages of Graphic Feedback
Tim e to Install an Option
Time to Install in Minutes
35
30
25
20
15
10
5
0
1
2
3
4
5
6
7
8
9
10
Week
When interpreting its performance, Jaguar will look for
continual improvement. It is easier to spot trends or
unusual performance if this data is presented graphically.
© 2006 McGraw-Hill Ryerson Ltd.
ROI and the Balanced Scorecard
It may not be obvious to managers how to increase sales,
decrease costs, and decrease investments in a way that is
consistent with the company’s strategy. A well constructed
balanced scorecard can provide managers with a road map that
indicates how the company intends to increase ROI.
Which internal business
process should be
improved?
Which customers should
be targeted and how will
they be attracted and
retained at a profit?
© 2006 McGraw-Hill Ryerson Ltd.
Delivery Performance Measures
Order
Received
Wait Time
Production
Started
Goods
Shipped
Process Time + Inspection Time
+ Move Time + Queue Time
Throughput Time
Delivery Cycle Time
Process time is the only value-added time.
© 2006 McGraw-Hill Ryerson Ltd.
Delivery Performance Measures
Order
Received
Wait Time
Production
Started
Goods
Shipped
Process Time + Inspection Time
+ Move Time + Queue Time
Throughput Time
Delivery Cycle Time
Manufacturing
Cycle
=
Efficiency
© 2006 McGraw-Hill Ryerson Ltd.
Value-added time
Manufacturing cycle time
Quick Check 
A TQM team at Narton Corp has recorded the
following average times for production:
Wait
3.0 days
Inspection 0.4 days
Process 0.2 days
Move 0.5 days
Queue 9.3 days
What is the throughput time?
a. 10.4 days
b. 0.2 days
c. 4.1 days
d. 13.4 days
© 2006 McGraw-Hill Ryerson Ltd.
Quick Check 
A TQM team at Narton Corp has recorded the
following average times for production:
Wait
3.0 days
Inspection 0.4 days
Process 0.2 days
Move 0.5 days
Queue 9.3 days
What is the throughput time?
a. 10.4 days
b. 0.2 days
Throughput
time = Process + Inspection + Move + Queue
c. 4.1 days = 0.2 days + 0.4 days + 0.5 days + 9.3 days
= 10.4 days
d. 13.4 days
© 2006 McGraw-Hill Ryerson Ltd.
Quick Check 
A TQM team at Narton Corp has recorded the
following average times for production:
Wait
3.0 days
Inspection 0.4 days
Process 0.2 days
What is the MCE?
a. 50.0%
b. 1.9%
c. 52.0%
d. 5.1%
© 2006 McGraw-Hill Ryerson Ltd.
Move 0.5 days
Queue 9.3 days
Quick Check 
A TQM team at Narton Corp has recorded the
following average times for production:
Wait
3.0 days
Inspection 0.4 days
Process 0.2 days
Move 0.5 days
Queue 9.3 days
What is the MCE?
a. 50.0%
MCE = Value-added time ÷ Throughput time
b. 1.9%
= Process time ÷ Throughput time
c. 52.0%
= 0.2 days ÷ 10.4 days
d. 5.1%
= 1.9%
© 2006 McGraw-Hill Ryerson Ltd.
Quick Check 
A TQM team at Narton Corp has recorded the
following average times for production:
Wait
3.0 days
Inspection 0.4 days
Process 0.2 days
Move 0.5 days
Queue 9.3 days
What is the delivery cycle time?
a. 0.5 days
b. 0.7 days
c. 13.4 days
d. 10.4 days
© 2006 McGraw-Hill Ryerson Ltd.
Check

Delivery cycleQuick
time = Wait
time + Throughput
time
= 3.0 days + 10.4 days
= 13.4 days
A TQM team at Narton Corp has recorded the
following average times for production:
Wait
3.0 days
Inspection 0.4 days
Process 0.2 days
Move 0.5 days
Queue 9.3 days
What is the delivery cycle time?
a. 0.5 days
b. 0.7 days
c. 13.4 days
d. 10.4 days
© 2006 McGraw-Hill Ryerson Ltd.
Review Problem
Return on Investment (ROI) and
Residual Income
© 2006 McGraw-Hill Ryerson Ltd.
Review Problem
The Magnetic Imaging Division of Medical
Diagnostics, Inc. has reported the following results for
last year’s operations:



Sales
Operating income
Average operating assets
$25 million
3 million
10 million
1. Compute the margin, turnover, and ROI for the Magnetic
Imaging Division.
2. Top management of Medical Diagnostics, Inc. has set a
minimum required rate of return on average operating assets
of 25%. What is the Magnetic Division’s residual income for
the year?
© 2006 McGraw-Hill Ryerson Ltd.
Transfer Pricing
Appendix 12A
© 2006 McGraw-Hill Ryerson Ltd.
Key Concepts/Definitions
A transfer price is the price
charged when one segment of
a company provides goods or
services to another segment of
the company.
The fundamental objective in
setting transfer prices is to
motivate managers to act in the
best interests of the overall
company.
© 2006 McGraw-Hill Ryerson Ltd.
Three Primary Approaches
There are three primary
approaches to setting
transfer prices:
1. Negotiated transfer prices
2. Transfers at the cost to the
selling division
3. Transfers at market price
© 2006 McGraw-Hill Ryerson Ltd.
Negotiated Transfer Prices
A negotiated transfer price results from discussions
between the selling and buying divisions.
Advantages of negotiated transfer prices:
1.
They preserve the autonomy of the
divisions, which is consistent with
the spirit of decentralization.
2.
The managers negotiating the
transfer price are likely to have much
better information about the potential
costs and benefits of the transfer
than others in the company.
© 2006 McGraw-Hill Ryerson Ltd.
Range of Acceptable
Transfer Prices
Upper limit is
determined by the
buying division.
Lower limit is
determined by the
selling division.
Harris and Louder – An Example
Assume the information as shown with
respect to Imperial Beverages and Pizza
Maven (both companies are owned by Harris
and Louder).
Imperial Beverages:
Ginger beer production capactiy per month
Variable cost per barrel of ginger beer
Fixed costs per month
Selling price of Imperial Beverages ginger beer
on the outside market
Pizza Maven:
Purchase price of regular brand of ginger beer
Monthly comsumption of ginger beer
© 2006 McGraw-Hill Ryerson Ltd.
10,000 barrels
£8 per barrel
£70,000
£20 per barrel
£18 per barrel
2,000 barrels
Harris and Louder – An Example
The selling division’s (Imperial Beverages) lowest acceptable transfer
price is calculated as:
Transfer Price 
Variable cost
Total contribution margin on lost sales
+
per unit
Number of units transferred
Let’s calculate the lowest and highest acceptable
transfer prices under three scenarios.
The buying division’s (Pizza Maven) highest acceptable transfer price is
calculated as:
Transfer Price  Cost of buying from outside supplier
If an outside supplier does not exist, the highest acceptable transfer price
is calculated as:
Transfer Price  Profit to be earned per unit sold (not including the transfer price)
© 2006 McGraw-Hill Ryerson Ltd.
Harris and Louder – An Example
If Imperial Beverages has sufficient idle capacity (3,000 barrels) to satisfy
Pizza Maven’s demands (2,000 barrels) without sacrificing sales to other
customers, then the lowest and highest possible transfer prices are
computed as follows:
Selling division’s lowest possible transfer price:
Transfer Price  £8 +
£0
= £8
2,000
Buying division’s highest possible transfer price:
Transfer Price  Cost of buying from outside supplier
Therefore, the range of acceptable
transfer price is £8 – £18.
© 2006 McGraw-Hill Ryerson Ltd.
= £18
Harris and Louder – An Example
If Imperial Beverages has no idle capacity (0 barrels) and must sacrifice other
customer orders (2,000 barrels) to meet Pizza Maven’s demands (2,000
barrels), then the lowest and highest possible transfer prices are computed
as follows:
Selling division’s lowest possible transfer price:
( £20 - £8) × 2,000
Transfer Price  £8 +
= £20
2,000
Buying division’s highest possible transfer price:
Transfer Price  Cost of buying from outside supplier
Therefore, there is no range of
acceptable transfer prices.
© 2006 McGraw-Hill Ryerson Ltd.
= £18
Harris and Louder – An Example
If Imperial Beverages has some idle capacity (1,000 barrels) and must
sacrifice other customer orders (1,000 barrels) to meet Pizza Maven’s
demands (2,000 barrels), then the lowest and highest possible transfer prices
are computed as follows:
Selling division’s lowest possible transfer price:
( £20 - £8) × 1,000
Transfer Price  £8 +
= £14
2,000
Buying division’s highest possible transfer price:
Transfer Price  Cost of buying from outside supplier
Therefore, the range of acceptable
transfer price is £14 – £18.
© 2006 McGraw-Hill Ryerson Ltd.
= £18
Evaluation of Negotiated Transfer
Prices
If a transfer within a company would result in
higher overall profits for the company, there is
always a range of transfer prices within which
both the selling and buying divisions would
have higher profits if they agree to the
transfer.
If managers are pitted against each other
rather than against their past performance or
reasonable benchmarks, a noncooperative
atmosphere is almost guaranteed.
Given the disputes that often accompany the
negotiation process, most companies rely on
some other means of setting transfer prices.
© 2006 McGraw-Hill Ryerson Ltd.
Transfers at the Cost to the Selling
Division
Many companies set transfer prices at either
the variable cost or full (absorption) cost
incurred by the selling division.
Drawbacks of this approach include:
1. Using full cost as a transfer price
and can lead to suboptimization.
2. The selling division will never
show a profit on any internal
transfer.
3. Cost-based transfer prices do
not provide incentives to control
costs.
© 2006 McGraw-Hill Ryerson Ltd.
Transfers at Market Price
A market price (i.e., the price charged for an
item on the open market) is often regarded as
the best approach to the transfer pricing
problem.
1. A market price approach works
best when the product or service
is sold in its present form to
outside customers and the
selling division has no idle
capacity.
2. A market price approach does
not work well when the selling
division has idle capacity.
© 2006 McGraw-Hill Ryerson Ltd.
Divisional Autonomy and
Suboptimization
The principles of
decentralization suggest
that companies should
grant managers autonomy
to set transfer prices and
to decide whether to sell
internally or externally,
even is this may
occasionally result in
suboptimal decisions.
This way top management
allows subordinates to
control their own destiny.
© 2006 McGraw-Hill Ryerson Ltd.
International Aspects of Transfer
Pricing
Transfer Pricing
Objectives
Domestic
• Greater divisional autonomy
• Greater motivation for managers
• Better performance evaluation
• Better goal congruence
© 2006 McGraw-Hill Ryerson Ltd.
International
• Less taxes, duties, and tariffs
• Less foreign exchange risks
• Better competitive position
• Better governmental relations
End of Chapter 12
© 2006 McGraw-Hill Ryerson Ltd.