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What is a key performance indicator?

Short Answer

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Answer

KPI is a quantifiable metric that shows how successfully a corporation is reaching important business objectives.

Step by step solution

01

Meaning of Key performance indicator

An outline performance metric called a key performance indicator (KPI) is employed by directors to decide on the off chance that the association is succeeding in its targets.

02

Explaining a key performance indicator

A quantitative indicator of how successfully a company is completing its core goals is known as a key performance indicator (KPI). Associations use KPIs to measure their progress toward their goals. Low-level KPIs could focus on departmental tasks like sales, marketing, HR, or support, but high-level KPIs might focus on the business’s overall success.

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Most popular questions from this chapter

Classify each key performance indicator according to the balancedscorecard perspective it addresses. Choose from the following: financialperspective, customer perspective, internal business perspective, or learning andgrowth perspective.

9. Number of repeat customers

10. Employee turnover

11. Revenue growth

12. Number of on-time deliveries

13. Number of defects found during the manufacturing process

What are some limitations of financial performance measures?

Zims, a national manufacturer of lawn-mowing and snow-blowing equipment, segments its business according to customer type: professional and residential. The following divisional information was available for the past year:

Net Sales Revenue Operating Income Average Total Assets

Residential \( 550,000 \) 65,280 $ 192,000

Professional 1,090,000 164,820 402,000

Management has a 26% target rate of return for each division.

Requirements

1. Calculate each division’s ROI. Round all of your answers to four decimal places.

2. Calculate each division’s profit margin ratio. Interpret your results.

3. Calculate each division’s asset turnover ratio. Interpret your results.

4. Use the expanded ROI formula to confirm your results from Requirement 1. What can you conclude?

The Harris Company is decentralized, and divisions are considered investment centers. Harris has one division that manufactures oak dining room chairs with upholstered seat cushions. The Chair Division cuts, assembles, and finishes the oak chairs and then purchases and attaches the seat cushions. The Chair Division currently purchases the cushions for \(22 from an outside vendor. The Cushion Division manufactures upholstered seat cushions that are sold to customers outside the company. The Chair Division currently sells 800 chairs per quarter, and the Cushion Division is operating at capacity, which is 800 cushions per quarter. The two divisions report the following information:

Chair Division Cushion Division

Sales Price per Chair \) 85 Sales Price per Cushion \( 32

Variable Cost (other than cushion) 42 Variable Cost per Cushion 13

Variable Cost (cushion) 22

Contribution Margin per Chair \) 21 Contribution Margin per Cushion $ 19

Requirements

1. Determine the total contribution margin for Harris Company for the quarter.

2. Assume the Chair Division purchases the 800 cushions needed from the Cushion Division at its current sales price. What is the total contribution margin for each division and the company?

3. Assume the Chair Division purchases the 800 cushions needed from the Cushion Division at its current variable cost. What is the total contribution margin for each division and the company?

4. Review your answers for Requirements 1, 2, and 3. What is the best option for Harris Company?

5. Assume the Cushion Division has capacity of 1,600 cushions per quarter and can continue to supply its outside customers with 800 cushions per quarter and also supply the Chair Division with 800 cushions per quarter. What transfer price should Harris Company set? Explain your reasoning. Using the transfer price you determined, calculate the total contribution margin for the quarter.

One subunit of Track Sports Company had the following financial results last month:

Subunit X Actual Results Flexible Budget Flexible Budget % Variance

Variance (F or U) (F or U)

Net Sales

Revenue \( 474,000 \) 455,000

Variable

Expenses 261,000 255,000

Contribution

Margin 213,000 200,000

Traceable

Fixed Expenses 38,000 29,000

Divisional

Segment Margin \( 175,000 \) 171,000

Requirements

1. Complete the performance evaluation report for this subunit (round to two decimal places).

2. Based on the data presented and your knowledge of the company, what type of responsibility center is this subunit?

3. Which items should be investigated if part of management’s decision criteria is to investigate all variances equal to or exceeding \(8,000 andexceeding 10% (both criteria must be met)?

4. Should only unfavorable variances be investigated? Explain.

5. Is it possible that the variances are due to a higher-than-expected sales volume? Explain.

6. Will management place equal weight on each of the variances exceeding \)8,000? Explain.

7. Which balanced scorecard perspective is being addressed through this performance report? In your opinion, is this performance report a lead or a lag indicator? Explain.

8. List one key performance indicator for the three other balanced scorecard perspectives. Make sure to indicate which perspective is being addressed by the indicators you list.

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