Fifth edition Alnoor Bhimani Charles T. Horngren Srikant M. Datar Madhav V. Rajan Farah Ahamed

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Correcting students misconceptions
Teaching tips

Different performance measures
Curriculum linkage
Chapter 18 explains that transfer-pricing methods are evaluated on how well they meet three behavioural criteria goal congruence (acting in one’s own self-interest also promotes organisational interest, management effort (to produce efficiently and use resources wisely) and subunit autonomy. These three criteria can also be used to assess alternative performance evaluation methods, as discussed in Chapter 19.
Correcting students misconceptions
From the DuPont formula it appears that changing revenues would not affect ROI, since Revenues in the numerator of the investment turnover ratio and the denominator of the income margin ratio cancel out
Revenues
Income
Investment
Revenues
×
However, increasing revenues without increasing costs proportionally increases income, which in turn increases ROI.
Teaching tips
Explain the intuition behind the two ROI components. Investment turnover tells us how many revenue euros are generated by each euro of investment. The goal is to make each investment euro work harder to generate more sales. The income to revenue ratio (also called income

Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5
th
Edition, Instructor’s Manual
© Pearson Education Limited 2012 margin) tells us how much of each revenue euro goes to income. The goal is to get higher income per revenue euro. The product of these two ratios, ROI, tells us how much income each euro of investment generates.

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