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McDonald's Perf Measures: operating leverage, ROE, EVA

Explain what operating leverage, ROE, EVA are and how they measure performance. Pick another performance measure of your choice and explain it as well. Give the advantages and disadvantages of each of these measures. For each of these measures, compute them for McDonalds Corporation in 2012. Which measure is your preferred one? Why?

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Operating Leverage

Operating leverage is a measure of the degree of fixed costs. That is, in the total expenses, what proportion are fixed versus variable. This is important because high operating leverage magnifies the swings in profits when sales change. A small change in sales creates a large change in profits. So, growth is magnified but so are contractions.

We can't really compute this for McDonalds because they are not required to report fixed versus variable costs. They report operating versus non-operating but not variable versus fixed. If you assume that COGS is all variable and SG&A is all fixed, you can see the computation on the attached spreadsheet.

Return on Investment

Return on investment is the amount over the initial investment that you earned divided by the initial investment. This is usually reports as a percent. The return on investment for McDonalds is on the attached spreadsheet. ROI is usually more of a measure for a new project or particular decision. For the entire firm, the ROI is usually called the Return on Assets, using total assets as the "investment."

Return on investment is the performance measure used by an "investment center." Investment centers are responsible for ...

Solution Summary

Your tutorial is 697 words plus five references and suggests a new measure of performance and explains why. There is a spreadsheet attached with some assumptions and then the measures for McDonalds for 2012 shown for you. A sample balanced scorecard is presented.