| Course | AC505 Advanced Managerial/Cost Accounting |
|---|---|
| Unit | Unit 10 |
| Paper type | Performance evaluation report |
| Length | About 750 words, 5 pages double-spaced |
| Format | APA 7 student paper |
| School | Purdue University Global |
| Program | MS in Accounting |
| Updated | October 2026 |
Free sample paper for AC505 Unit 10
Why Your 20.9 Percent Turned Down a Good Pouch Line: A Unit 10 Performance Evaluation Report
[Student Name]
Purdue University Global
AC505: Advanced Managerial/Cost Accounting
Unit 10 Performance Evaluation Report
[Instructor Name]
[Date]
Harrow Creek Nut Company, its managers and every figure are composite; the textbooks and article cited are real.
Letter
Dear Ms. Okafor,
You asked why the finance committee questioned your decision not to pursue the squeeze-pouch line. This report sets out your division's results on three measures and shows how the choice of measure affected that decision.
Your Results on Three Measures
Return on investment divides operating income by invested assets. Your division earned $2,400,000 on $11,500,000, a return of 20.9 percent. The ingredients division earned $3,100,000 on $18,000,000, a return of 17.2 percent. On this measure, yours is the stronger division.
Residual income subtracts a required return on invested assets, here 10 percent, from operating income. Yours is $2,400,000 less $1,150,000, or $1,250,000. The ingredients division's is $3,100,000 less $1,800,000, or $1,300,000. On this measure, the divisions are nearly level, with ingredients slightly ahead.
Economic value added uses after-tax operating income, at a 25 percent rate, and charges the company's 9 percent cost of capital on invested capital net of current liabilities. Yours is $1,800,000 less 9 percent of $10,000,000, or $900,000. The ingredients division's is $2,325,000 less 9 percent of $16,000,000, or $885,000.
The Pouch Line
The pouch line required $2,000,000 of investment and was expected to earn $320,000 a year before tax, a return of 16.0 percent. That is above the company's 10 percent required return and its 9 percent cost of capital, so it adds value. But it is below your current 20.9 percent. Adding it would have lowered your division's return to $2,720,000 on $13,500,000, or 20.1 percent.
On residual income, the pouch line adds $320,000 less $200,000, or $120,000, raising your residual income to $1,370,000. On economic value added, it adds $240,000 after tax less $180,000 of capital charge, or $60,000, raising yours to $960,000.
Return on investment rewards a manager for protecting a high average, so a project that earns more than the company needs but less than the division already earns looks like a loss to the manager while it is a gain to the company.
Why This Happened
This is a known weakness of return on investment, not a failure of your judgment. Any project with a return between the company's cost of capital and a division's current return lowers that division's average while adding value to the company (Datar & Rajan, 2021). Divisions with the highest returns are the most likely to turn down good projects, which is the opposite of what the company wants.
Residual income and economic value added avoid this problem by testing each project against the price of the capital it ties up, not whether it beats the division's own average. Economic value added goes further by using after-tax figures and the actual cost of capital, which makes it closer to the change in shareholder value (Stern et al., 1995).
Recommendations
The finance committee will propose two changes for next year. First, divisional bonuses will be based on economic value added, with return on investment still reported for comparison. Second, capital requests between 9 percent and a division's current return will be reviewed by the committee directly, so that no manager is penalized for proposing them. The committee would also welcome a revised pouch line proposal now; on current figures it adds $60,000 a year of economic value.
What Each Measure Is Good For
None of the three measures should be dropped entirely. Return on investment remains useful for comparing divisions of different sizes and for spotting a division whose assets are earning less over time. Residual income is simple to explain and works well for project decisions. Economic value added is the most complete, but it requires adjustments, such as treating some research and marketing spending as investment, that managers find harder to follow. Reporting all three, while basing rewards on one, gives the committee a fuller picture without sending mixed signals about which decisions are wanted.
The committee will also publish the capital charge rate each year so managers can test proposals themselves.
A Note on Fairness
Your division's results are strong on every measure. The issue is the measure, not the performance, and the committee recognizes that you responded rationally to the incentives it set (Hilton & Platt, 2020).
Sincerely, Cost Analyst, for the Finance Committee
References
Datar, S. M., & Rajan, M. V. (2021). Horngren's cost accounting: A managerial emphasis (17th ed.). Pearson.
Hilton, R. W., & Platt, D. E. (2020). Managerial accounting: Creating value in a dynamic business environment (12th ed.). McGraw Hill.
Stern, J. M., Stewart, G. B., & Chew, D. H. (1995). The EVA financial management system. Journal of Applied Corporate Finance, 8(2), 32-46. https://doi.org/10.1111/j.1745-6622.1995.tb00285.x
AC505 Unit 10 instructions, in plain terms
The final AC505 unit asks you to evaluate divisional performance with more than one measure and explain the results to a manager. Write in letter or report form to the named reader, not to an instructor. Compute return on investment, residual income and economic value added for the divisions, stating the required return, tax rate and capital figures used. Then analyze a specific decision the manager made, showing how each measure would treat it. Explain why return on investment can lead managers to reject projects that add value, in terms the manager will accept. Describe what each measure is good for. Recommend changes to how performance is measured and rewarded, and address fairness to the manager. Reference the cost texts and Stern and colleagues on EVA in APA 7.
How the AC 505 Unit 10 example is put together
The sample letter to Ms. Okafor gives her division's results: $2,400,000 on $11,500,000, a 20.9 percent return, residual income of $1,250,000 and economic value added of $900,000, beside the ingredients division's 17.2 percent, $1,300,000 and $885,000. The pouch line section shows a 16.0 percent project lowering her return to 20.1 percent while adding $120,000 of residual income and $60,000 of EVA. The highlighted sentence explains the incentive problem. A section explains why it happens and what residual income and EVA fix, citing Stern and colleagues, followed by what each measure is good for, recommendations to base bonuses on EVA and a note on fairness.
AC505 Unit 10 rubric: what earns full points
Performance reports in AC505 earn points for correct measures and a clear explanation of how measures shape decisions. Graders check each computation, including the capital base and after-tax figures for economic value added. The rubric gives significant weight to analyzing a real decision under each measure and explaining the underinvestment problem with return on investment. Writing for the manager, in plain language that does not blame her, earns credit. Recommendations should change incentives, not only reporting. Recognizing what each measure is still good for shows balance. Reports that compute measures without connecting them to a decision, or that are written for an instructor, lose points. APA 7 references support the report.
AC505 Unit 10 help from the desk
Weak Unit 10 reports present three tables of measures and never connect them to what the manager did. Economic value added is computed on pretax income or total assets rather than invested capital net of current liabilities. The underinvestment problem is stated in jargon the manager would not follow. The report blames the manager for responding to the incentive the company set. Recommendations add more reports without changing rewards. If your section's case compares different divisions or a different project, a writer can compute the measures and write the report for the reader your case names.
Get an 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. The paper above is an original model document written by our desk, not a submitted student paper and not an official Purdue University Global document.
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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.
Where can I find a free AC505 Unit 10 sample paper?
This page holds a full AC505 Unit 10 performance evaluation report to a division manager at Harrow Creek Nut Company with ROI, residual income and EVA, a pouch line analysis and APA 7 references.
Why does the pouch line lower ROI but raise EVA?
It earns 16.0 percent, below the division's 20.9 percent average, so ROI falls. But its after-tax return exceeds the 9 percent cost of capital, so after the capital charge it adds $60,000 of economic value.