1.

POINT OF VIEW: The case will be analyzed from the standpoint of Edward
Brown, CEO of Quality Metal Service Center.
2. STATEMENT OF THE PROBLEM: What management control measures should
be implemented in Quality Metal Service Center to measure performance
and motivate managers to make decisions consistent with the strategy of the
firm?
3. ANALYSIS:
Elizabeth Barrets proposal to purchase new processing equipment will be
beneficial for the company as it will generate favorable earnings and
optimistic sales growth. Their market research supported that there is an
existing demand for the processed inventory so the acquisition will be in line
with the companys objective toward customer satisfaction. More
importantly, the proposal is favorable to the company because of its low
payback period of 4.5years; and it will yield an internal rate return of 21.8%
and a net present value of $286,000.
The key issue in the case is that the method of using ROA to measure and
evaluate performance does not encourage district managers to make
decisions which are aligned with the goals of Quality Metal. If Ken Richards
approves the acquisition of the new processing equipment, his incentive
bonus will decrease from 11.1% to 4.28% of his base salary. Hence, this will
discourage him from purchasing the new equipment even if the acquisition
would be beneficial for the company.
4. RECOMMENDATION:
In measuring and evaluating the performance of Quality Metal, EVA should
be used instead of ROA, because investments with relatively new assets will
show a lower ROA than investment with older assets. Using EVA is more
advantageous than ROA: with EVA all business units have the same profit
objective for comparable investment, investments that produce a profit in
excess of cost of capital will increase EVA and therefore economically
attractive to the manager, and using EVA as an evaluation on investments
could help managers to grow shareholder value.
Using EVA in Quality Metal will align the managers district objectives with
company goals. In this case for example, this will encourage Columbus
District Manager, Ken Richards, to take on additional assets which will
improve not only the districts performance but also the companys as a
whole. Moreover, if the company invests in the new equipment, as proposed
by Sales Manager Elizabeth Barret, it will allow the company to
accommodate the demand for processed metals with a shorter lead time;
this supports that the investment in the new assets is aligned with the
companys objective toward developing techniques and marketing programs

to increase market share.

With regard to the expense allocation for districts, income taxes and
corporate overheads should not be included since these expenses are
beyond the control of the managers.