Decentralization ResponsibilityCenters andTransferPricing CentralizationandDecentralizationSpectrum Highdegreeofdelegationofduties power andauthoritytolowerlevelsoftheorganization Highdegreeofretentionofduties power andauthoritybytopmanagement Decentralized Centralized Neithercentralizationnordecentralizationisnecessarilyadesirableorganizationalgoal DecentralizationinOrganizations BenefitsofDecentralization Topmanagementfreedtoconcentrateonstrategy Lower levelmanagersgainexperienceindecision making Decision makingauthorityleadstojobsatisfaction Lower leveldecisionoftenbasedonbetterinformation Improvesabilitytoevaluatemanagers DecentralizationinOrganizations DisadvantagesofDecentralization Lower levelmanagersmaymakedecisionswithoutseeingthe bigpicture Maybealackofcoordinationamongautonomousmanagers Lower levelmanager sobjectivesmaynotbethoseoftheorganization Maybedifficulttospreadinnovativeideasintheorganization DecentralizationandSegments Asegmentisanypartoractivityofanorganizationaboutwhichamanagerseekscost revenue orprofitdata Asegmentcanbe QuickMart AnIndividualStore ASalesTerritory AServiceCenter Cost Profit andInvestmentsCenters CostCenterAsegmentwhosemanagerhascontrolovercosts butnotoverrevenuesorinvestmentfunds Cost Cost Cost Cost Profit andInvestmentsCenters ProfitCenterAsegmentwhosemanagerhascontroloverbothcostsandrevenues butnocontroloverinvestmentfunds Revenues SalesInterestOther Costs Mfg costsCommissionsSalariesOther Cost Profit andInvestmentsCenters InvestmentCenterAsegmentwhosemanagerhascontrolovercosts revenues andinvestmentsinoperatingassets CorporateHeadquarters Cost Profit andInvestmentsCenters ResponsibilityCenter CostCenter ProfitCenter InvestmentCenter Cost profit andinvestmentcentersareallknownasresponsibilitycenters ReturnonInvestment ROI Formula Cash accountsreceivable inventory plantandequipment andotherproductiveassets Incomebeforeinterestandtaxes EBIT ReturnonInvestment ROI Formula RegalCompanyreportsthefollowing Netoperatingincome 30 000Averageoperatingassets 200 000Sales 500 000 ControllingtheRateofReturn ThreewaystoimproveROI IncreaseSales ReduceExpenses ReduceAssets ControllingtheRateofReturn Regal smanagerwasabletoincreasesalesto 600 000whichincreasednetoperatingincometo 42 000 Therewasnochangeintheaverageoperatingassetsofthesegment Let scalculatethenewROI ReturnonInvestment ROI Formula NetoperatingincomeSales SalesaaaaaaaaaAverageoperatingassets ROI 42 000 600 000 600 000 200 000 21 Wecanmodifyouroriginalformulaslightly ROI ROI WeincreasedROIfrom15 to21 Margin Turnover CriticismsofROI Intheabsenceofthebalancedscorecard managementmaynotknowhowtoincreaseROI Managersofteninheritmanycommittedcostsoverwhichtheyhavenocontrol ManagersevaluatedonROImayrejectprofitableinvestmentopportunities TheBalancedScorecard Managementtranslatesitsstrategyintoperformancemeasuresthatemployeesunderstandandaccept Performancemeasures Financial Customers Learningandgrowth Internalbusinessprocesses CriticismsofROI AsdivisionmanageratWinston Inc yourcompensationpackageincludesasalaryplusbonusbasedonyourdivision sROI thehigheryourROI thebiggeryourbonus ThecompanyrequiresanROIof15 onallnewinvestments yourdivisionhasbeenproducinganROIof30 YouhaveanopportunitytoinvestinanewprojectthatwillproduceanROIof25 Asdivisionmanagerwouldyouinvestinthisproject CriticismsofROI Asdivisionmanager Iwouldn tinvestinthatprojectbecauseitwouldlowermypay CriticismsofROI Gee Ithoughtweweresupposedtodowhatwasbestforthecompany ResidualIncome AnotherMeasureofPerformance Netoperatingincomeabovesomeminimumreturnonoperatingassets ResidualIncome AdivisionofZepher Inc hasaverageoperatingassetsof 100 000andisrequiredtoearnareturnof20 ontheseassets Inthecurrentperiodthedivisionearns 30 000 Let scalculateresidualincome ResidualIncome MotivationandResidualIncome ResidualincomeencouragesmanagerstomakeprofitableinvestmentsthatwouldberejectedbymanagersusingROI CompanyA sreturnoninvestment ROI is A 36 B 20 C 15 D 4 ThefollowinginformationisavailableonCompanyA Sales 900 000Netoperatingincome36 000Stockholders equity100 000Averageoperatingassets180 000Minimumrequiredrateofreturn15 ThefollowingdataareavailablefortheSouthDivisionofRedrideProducts Inc andthesingleproductitmakes Unitsellingprice 20Variablecostperunit 12Annualfixedcosts 280 000Averageoperatingassets 1 500 000HowmanyunitsmustSouthselleachyeartohaveanROIof16 A 240 000 B 1 300 000 C 65 000 D 52 000 Allotherthingsequal acompany sreturnoninvestment ROI wouldgenerallyincreasewhen A salesdecrease B averageoperatingassetsincrease C operatingexpensesincrease D operatingexpensesdecrease TRANSFERPRICING Atransferpriceisthepricechargedwhenonesegment forexample adivision providesgoodsorservicestoanothersegmentofthesamecompany TRANSFERPRICING SomePoints Transferpricesarenecessarytocalculatecostsinacost profit orinvestmentcenter Thepurchasingdivisionwillnaturallywantalowtransferpriceandsellingdivisionwillwantahightransferprice Fromthestandpointofthefirmasawhole transferpricesinvolve takingmoneyouto