BU330 Assignment-4 Portia Carter

| July 29, 2018

Return on Investment and Residual Income

Portia Carter is the president of a company that owns six multiplex
movie theaters. Carter has delegated decision-making authority to the
theater managers for all decisions except those relating to capital
expenditures and film selection. The theater managers’ compensation
depends on the profitability of their theaters. Max Burgman, the
manager of the Park Theater, had the following master budget and actual
results for the month.

Master Actual
Budget Results
Tickets sold 120,000 480,000
Revenue–tickets $ 840,000 $ 880,000
Revenue–concessions 480,000 330,000
Total revenue $1,320,000 $1,210,000
Controllable variable costs
Concessions 120,000 99,000
Direct labor 420,000 330,000
Variable overhead 540,000 550,000
Contribution margin $ 240,000 $ 231,000
Controllable fixed costs
Rent 55,000 55,000
Other administrative expenses 45,000 50,000
Theater operating income $ 140,000 $ 126,000

1. Assuming that the theaters are profit centers, prepare a performance
report for the Park Theater using the chart below. Include a flexible
budget. Determine the variances between actual results, the flexible
budget, and the master budget. (25 points)

Actual Flexible Master
Results Variance Budget Variance Budget
Tickets sold 110,000 ( ) 120,000
Revenue–tickets $ 880,000 ( ) ( ) $ 840,000
Revenue–concessions 330,000 ( ) ( ) 480,000
Total revenue $1,210,000 ( ) $1,320,000
Controllable variable costs
Concessions 99,000 ( ) ( ) 120,000
Direct labor 330,000 ( ) ( ) 420,000
Variable overhead 550,000 ( ) ( ) 540,000
Contribution margin $ 231,000 ( ) ( ) $ 240,000
Controllable fixed costs
Rent 55,000 55,000
Other administrative expenses 50,000 ( ) 45,000
Theater operating income $ 126,000 ( ) ( ) $ 140,000

2. Evaluate Burgman’s performance as a manager. (25 points)

3. Assume that the managers are assigned responsibility for capital
expenditures and that the theaters are thus investment centers. Park
Theater is expected to generate a desired ROI of at least 6 percent on
average invested assets of $2,000,000.

a. Compute the theater’s return on investment and residual income using the chart below. (25 points)

Actual Flexible Master
ROI ÷ ÷ ÷
= 0.00% = 0.00% = 0.00%
Residual income – ( 0% x ) – ( 0% x ) – ( 0% x )
= = =

b. Using the ROI and residual income, evaluate Burgman’s performance as a manager. (25 points)

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