In modern strategic management accounting it is important to use appropriate performance measurements and control concepts, underpinned by theories and models applied in a variety of marketing settings and also to incorporate the inter-related nature of the performance measurements and control concepts and the specific business environment(s). It is necessary for effective management of profit and not-for-profit organisations to analyse the elements of performance measurements and control and the role of different elements in achieving financial objectives.
Suppose you have recently been appointed as a financial consultant at North Pole Plc. Your first task is to report to CEO about, Santa division one of the companies promising unit.
The Santa division, had budgeted a net profit before tax (PBIT) of £3 million per annum over the period of the foreseeable future, based on a net capital employed of £10 million. The plant replacement anticipated over this period is expected to be approximately equal to the annual deprecation per year. These figures compare well with the organisation's required rate of return of 20% before tax.
Santa division management is currently considering a substantial expansion of its manufacturing capacity to cope with the forecast demands of a new customer. The customer is prepared to offer a five-year contract providing Santa division with annual sales of £2 million.
In order to meet this contract, a total additional capital outlay of £2 million is envisaged (being £1.5 million of new fixed assets plus £0.5 million working capital). A five-year plant life is expected.
Operating costs on the contract are estimated to be £1.35 million per annum, excluding depreciation.
This is considered to be a low-risk venture as the contract would be firm for five years and the manufacturing processes are well understood within Santa division.
In your report to the CEO, you are required to demonstrate a critical appreciation of expansion plan of Santa division management. You are suggested to base your report on the above data, and keeping in mind the FEEDER approach, i.e. Find, Elaborate, Evaluate, Develop, Extract and Report, you must address the following areas:
1. The impact of accepting the contract on the Santa divisional Return on capital employed (ROCE) and Residual Income (RI) indicatingwhether it would be attractive to Santa's management.
2. Explain the basis of the calculations in the statements you have produced and discuss the suitability of each method in directing divisional performance management toward the achievement of corporate goals.
3. "Divisional performance evaluation should be based on a combination of financial and non-financial measures using the balanced scorecard approach".
Making special reference to Kaplan and Norton (1992) article and statement above include in your report a critical assessment of "balanced scorecard" approach as a divisional performance measure for North Pole Plc.