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    Evaluating Profit and Investment Preformance

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    Ricky Bobbie, the managing partner of the law firm Bobbie, Bagan, and Clark, LLP, makes asset acquisition and disposal decisions for the firm. As managing partner, he supervises the partners in charge of the firm's three branch offices. Those partners have the authority to make employee compensation decisions. The partners' compensation depends on the profitability of their branch office. Victoria Smith manages the City Branch, which has the following master budget and actual results for the year.

    Master Budget Actual Results
    Billed hours 5,000 4,900
    Revenue $250,000 $254,800
    Controllable variable costs
    Direct labor 120,000 137,200
    Variable overhead 40,000 34,300
    Contribution margin $90,000 $83,300
    Controllable fixed costs
    Rent 30,000 30,000
    Other administrative expenses 45,000 42,000
    Branch operating income $15,000 $11,300

    1. Assume that City Branch is a profit center. Please help me prepare a performance report that includes a flexible budget. And determine the variances between actual results, the flexible budget, and the master budget.

    2. Evaluate Victoria Smith's performance as manager of the City Branch.

    3. Assume that the branch managers are assigned responsibility for capital expenditures and that the branches are thus investment centers. City Branch is expected to generate a desired ROI of at least 30 percent on average invested assets of $40,000.
    a. Compute the branch's return on investment and residual income.
    b.Using the ROI and residual income, evaluate Victoria Smith's performance as a branch manager.

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