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part b) of the question has asked to evaluate the net income as the performance measure for the regional offices and to suggest other measures and why they are appropriate for each office?
The answer is focused solely on financial measures such as cash flow, operating profit, accounts receivable etc regarding each regional offices. And it concludes that operating profit is the most appropriate performance measure than net income.
Well, honestly talking, before looking at the answer, I was focusing my answer in a totally different point of view. Suggesting that as LLA is a service agency offering 3 categories of advertising services (strategic, Buying and Creative), it should use non-financial measures to measure the performance of the regions. Even though the question doesn`t give any information about non-financial performance of the offices.
My question is, if I had used this logic in that exam,would I have failed this part of the question?
Thank you for your patience 🙂
P5 places a lot of emphasis on non-financial performance measures and this question does not specify that it wants financial performance measures only. Here is an extract from the examiner’so report:
The second part required justified recommendations of alternative metrics. Most candidates realised that nonfinancial indicators would be useful and those that made suggestions appropriate to LLA scored well. Those that offered lists of metrics that could apply to any company scored significantly less well. There were many answers that provided lengthy (possibly rote-learned) proposals of ROCE, EVATM and RI although these were of limited use in this scenario, as they did not address the issues in the different offices nor did they address the fact that LLA would be likely to have a large intangible asset base. The better solutions made sure that their comments on these alternatives were consistent with their criticism of the existing measure.
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