Tui Acc501 Slp 5

Ratios are used for many purposes, performance measurement is one such application. However, not all performance measures are expressed as a ratio. Do some research on the Internet to learn about operating leverage, ROI, EVA, and pick another performance measure of your choice. You will note that there are variations in the computations of a particular measurement. Consistency in application is the key.

Reflect on the advantages and disadvantages of these performance measures. Choose your preferred measure and explain your rationale.

Listed below are performance measures for operating leverage, return on investment (ROI), economic value added (EVA), and inventory turnover.

In most cases, such as this, operating leverage is an educated guess. Fixed costs and variable costs are not reported to the public. Therefore, we must make assumptions about the proportions of each. As in previous reports, I assumed that fixed costs would account for approximately 80% of operating expenses and 25% of the costs of goods sold. As can be seen, fixed costs account for the majority of expenses for Nike Inc. While operating leverage is not a performance measure it does provide valuable information. It provides investors a ball park figure on how much the company is paying in fixed costs to produce a certain profit. A large operating leverage would indicate that the company either has high fixed costs or low operating income. Obviously, an operating leverage close to one would indicate stellar performance.

Return on investment is a very beneficial, and widely used performance measure. It is a direct measurement of growth. Therefore, manager can see how much profit is generated as compare to how much is tied up goods waiting to be sold as well as the equipment required to produce those profits. ROI in turn, helps keep managers accountable. They must balance profits, attempting to keep them consistent, with production numbers and total assets. Managers cannot...