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Responsibility Centers

Responsibility Centers. A responsibility center is the point in an organization where the control over revenue or expense is located, e.g. division,department or a single machine. A responsibility center may be divided into three categories cost profit investment.

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Responsibility Centers

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  1. Responsibility Centers • A responsibility center is the point in an organization where the control over revenue or expense is located, e.g. division,department or a single machine. • A responsibility center may be divided into three categories • cost • profit • investment

  2. Types of Responsibility Centers Cost Center A business segment that incurs expenses but does not generate revenue. Cost

  3. Types of Responsibility Centers Profit Center A part of the business that has control over bothrevenues and expenses, but no control over investment funds. Revenues Sales Interest Other Expenses Manufacturing Commissions Salaries Other

  4. Types of Responsibility Centers Investment Center A profit center where management also makes capital investment decisions. Corporate Headquarters

  5. Evaluation Measures Cost control Quantity and qualityof services Cost Center Profit Center Profitability Investment Center Return on investment (ROI) Residual income (RI) Measuring Managerial Performance

  6. Net Income Investment ROI = Return on Investment Return on investment is the ratio of income to the investment used to generate the income.

  7. Net Income Sales Sales Investment Return on Investment Net Income Investment ROI = ROI = × Margin Turnover

  8. Return on Investment Cola Company reports the following: Net Income $ 30,000 Sales $ 500,000 Investment $ 200,000 Let’s calculate ROI.

  9. ROI = ROI = × × Net Income Sales $30,000 $500,000 Sales Investment $500,000 $200,000 Return on Investment ROI = 6% × 2.5= 15%

  10. Improving R0I • Reduce Expenses Three ways to improve ROI • Increase • Sales • Reduce Investment

  11. Improving R0I • Cola Company’s manager was able to increase sales to $600,000 which increased net income to $42,000. • There was no change in investment. Let’s calculate the new ROI.

  12. ROI = ROI = × × Net Income Sales $42,000 $600,000 Sales Investment $600,000 $200,000 Improving R0I ROI = 7% × 3= 21% Cola Company increased ROI from 15% to 21%.

  13. ROI - A Major Drawback • As division manager at Cola Company,your compensation package includesa salary plus bonus based on your division’sROI -- the higher your ROI, the bigger your bonus. • The company requires an ROI of 20% on all new investments -- your division has been producing an ROI of 30%. • You have an opportunity to invest in a new project that will produce an ROI of 25%. As division manager would you invest in this project?

  14. ROI - A Major Drawback Gee . . . I thought we were supposed to do what was best for the company! As division manager, I wouldn’t invest in that project because it would lower my pay!

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