Exam 20: Management Compensation, Business Analysis, and Business Valuation

Performance of divisional managers at Leakproof Faucet Corporation is evaluated based on the operating incomes of the divisions. Abbreviated income statements for the year ending 2019 are shown below for the three divisions of Leakproof Faucet Corp: Newton Granite Longview Totals Revenues (in thousands) \ 2,500 \ 1,250 \ 1,500 \ 5,250 COGS 1.300 575 600 2,475 Gross Margin 1,200 675 900 2,775 Division Overhead 250 125 150 525 Corporate Overhead* 524 262 314 1,100 Operating Incomes 426 288 436 1,150 *Total Corporate Overhead is allocated to each division based on the division's proportion of total revenues. The manager of the Newton division, through increases in manufacturing efficiency, created some additional capacity in 2019. The only way he could have utilized this capacity would have been to manufacture a model J-5 faucet, which would have had the following impact on the Newton division: Increase in annual revenues (in thousands) of $750. Increase in cost of goods sold of $600. Increase in division overhead of $100. Mr. Garrett, the Newton division manager, chose not to manufacture the J-5 faucets; therefore, the additional capacity went unused. Required: (1) Prepare revised income statements for the three divisions for 2019 assuming that Mr. Garrett had chosen instead to utilize the additional capacity to manufacture the model J-5. (2) Calculate the contribution margin of the Newton division if J-5 is manufactured and if it is not manufactured. (3) Why did Mr. Garrett choose not to manufacture the J-5? (4) Would Leakproof Faucets have benefited from the manufacture of the J-5? (5) Identify an advantage and a disadvantage of not allocating any corporate overhead to the divisions.

A method for determining a bonus based upon the performance of the unit is a(n):

The price-earnings ratio for firms in the Standard & Poor's 500 Index has averaged ________ over the last 110 years.

Methods for directly valuing a firm include: Earnings Discounted Financial Multiple Cash Flow Ratios A) Yes Yes Yes B) No Yes Yes C) No No Yes D) Yes Yes No E) Yes No Yes

Which of the following compensation plans would be tailored for a manager in a "growth" product sales life cycle phase?

The discounted cash flow (DCF) method of valuation uses the discounted present value of cash flow so it is not subject to the bias of different:

Which one of the following computes value based on annual earnings?

Bases for management bonus compensation often include: