Return on investment, residual income and economic value added are computed for two divisions and a proposed pouch line, then explained to the consumer manager in AC505's Unit 10 report. Searches like "ac 505 unit 10 assignment example", "ac505 unit 10 sample" and "ac505 unit 10 example" land here.
What a finished AC505 Unit 10 performance evaluation report looks like
A four-page report in letter format, with an exhibit of divisional figures. Her results on three measures open the letter. Return on investment is 20.9 percent against the ingredients division's 17.2. Residual income, at a 10 percent required return, is 1,250,000 dollars against 1,300,000. Economic value added, after tax at 25 percent and a 9 percent cost of capital, is 900,000 against 885,000. The report then takes up the pouch line she declined: 2,000,000 dollars of investment earning 320,000 a year, a 16.0 percent return that would pull her division to 20.1 percent while adding 120,000 of residual income and 60,000 of economic value added. A final section adjusts for 600,000 dollars of retailer slotting fees expensed this year.
How a AC505 Unit 10 example is structured
Results, a decision the measures distort, adjustments, recommendation. The report opens with the three measures side by side and a sentence on what each rewards. The pouch line follows, because it shows the problem in the manager's own terms: a project earning more than the company's required return but less than her division's current return makes her ratio worse, so a manager paid on return on investment rationally declines it. The ingredients division's figures show a second distortion, since its return on net book value, 17.2 percent, would be 10.7 percent on gross book value; older assets flatter it. The adjustment section capitalizes the slotting fees over three years, which lifts consumer economic value added to 1,164,000 dollars. The close recommends evaluating both divisions on economic value added from next year, explains what would change in her bonus calculation, and invites her questions.
Three measures, two divisions
Consumer earns 2,400,000 dollars on 11,500,000 of assets; ingredients earns 3,100,000 on 18,000,000. Return on investment favors consumer, residual income favors ingredients by 50,000, and economic value added puts them within 15,000 of each other.
The pouch line she declined
Investment of 2,000,000 earning 320,000 a year returns 16.0 percent, above the 10 percent the company requires but below her division's 20.9. Accepting it drops her return to 20.1 percent while adding value on both other measures.
Old assets and a flattering ratio
Ingredients reports 17.2 percent on net book value. On gross book value of 29,000,000 the return is 10.7 percent. The report notes that roasters bought a decade ago make that division look better each year they age.
Slotting fees, capitalized
Retailers charged 600,000 dollars this year for new shelf placements that will earn sales for about three years. Capitalizing them and expensing 200,000 lifts adjusted economic value added from 900,000 to 1,164,000, closer to what the fees bought.
What changes next year
Bonuses would move from return on investment to economic value added, with the slotting adjustment standard for both divisions. The report shows her this year's figure under the new rule and lists the questions to settle with the controller.
Where marks go in AC505 Unit 10
A report written to the instructor rather than to the manager named in the case gives up the audience marks this unit usually carries, since the point is explaining measures to the person they judge. Computing three measures without showing a decision they distort leaves the comparison academic; the declined project is where AC505 graders usually probe for understanding. Economic value added computed on pretax income, or on total assets instead of invested capital, costs computation marks. Answers earn credit for spotting the asset-age problem in return on investment and for at least one accounting adjustment justified by what the spending bought. A recommendation ignoring how the manager's pay would change reads as naive about the behavior performance measures exist to shape. Plain language matters, since a division manager is not assumed to know the formulas.
Get a AC505 Unit 10 example written to your instructions
Performance reports are written for someone, usually the manager the Unit 10 case names. Send the divisional figures, required return, tax rate, cost of capital, any proposed project and the rubric; within 24-48h a report addressed to that manager computes each measure and explains one decision the current measure distorts. The first custom sample costs nothing.
AC505 Unit 10 questions, answered
Why would return on investment make a manager reject a good project?
Because a manager judged on the division's percentage return improves that percentage by accepting only projects that beat the current average. A project earning above the company's required return but below the division's existing return lowers the average, so it gets declined even though it adds value. Residual income and economic value added measure dollars above the required return, removing that incentive.
What is the difference between residual income and EVA?
Both subtract a capital charge from income. Residual income usually uses operating income, a required rate and the division's assets as reported. Economic value added uses after-tax operating profit, the cost of capital and invested capital, and often adjusts the accounting figures, for example by capitalizing spending that creates future benefits. The report should state which definitions it uses.
Should the report be written for an accountant?
Usually not. The case normally names a division manager, so the report should explain each measure in a sentence, show the manager's own figures and connect the result to decisions and pay. Formulas and detailed calculations belong in an exhibit. Graders in many sections assess whether a non-accountant could act on the report without asking for help.