(a) Brace Co is an electronics company specialising in the manufacture of home audio equip

(a) Brace Co is an electronics company specialising in the manufacture of home audio equipment. Historically, the company has used solely financial performance measures to assess the performance of the company as a whole. The company’s Managing Director has recently heard of the ‘balanced scorecard approach’ and is keen to learn more.

Required:

Describe the balanced scorecard approach to performance measurement. (10 marks)

(b) Brace Co is split into two divisions, A and B, each with their own cost and revenue streams. Each of the divisions is managed by a divisional manager who has the power to make all investment decisions within the division. The cost of capital for both divisions is 12%. Historically, investment decisions have been made by calculating the return on investment (ROI) of any opportunities and at present, the return on investment of each division is 16%.

A new manager who has recently been appointed in division A has argued that using residual income (RI) to make investment decisions would result in ‘better goal congruence’ throughout the company.

Each division is currently considering the following separate investments:

The company is seeking to maximise shareholder wealth.

Required:

Calculate both the return on investment and residual income of the new investment for each of the two divisions. Comment on these results, taking into consideration the manager’s views about residual income. (10 marks)

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