Evaluating a profit center
Pamila Smith, the president of Smith Toys Corporation, is trying to determine this year’s pay raises for the store managers. Smith Toys has seven stores in the southwestern United States. Corporate headquarters purchases all toys from different manufacturers globally and distributes them to individual stores. Additionally, headquarters makes decisions regarding location and size of stores. These practices allow Smith Toys to receive volume discounts from vendors and to implement coherent marketing strategies. Within a set of general guidelines, store managers have the flexibility to adjust product prices and hire local employees. Ms. Smith is considering three possible performance measures for evaluating the individual stores: cost of goods sold, return on sales (net income divided by sales), and return on investment.
Required
a Using the concept of controllability, advise Ms. Smith about the best performance measure.
b Explain how a balanced scorecard can be used to help Ms. Smith.
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