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Question 4a

Soup operates passenger rail services in Deeland, a technologically advanced country, with high demand for fast reliable rail travel from business and leisure passengers. Many passengers choose train travel because they see it as less harmful to the environment than other forms of transport.

Soup’s main objective is to maximise shareholder wealth. Since becoming licensed to operate routes in Regions A and B by the Deeland government five years ago, Soup has consistently delivered increased dividends and share prices for investors. In its initial appraisal of the licensing opportunity, Soup expected to operate the routes for at least 15 years, however, their licence may not be renewed when it expires in three years’ time. The government has warned Soup it ‘is unhappy about high returns to shareholders while there are many reports of poor passenger service, overcrowded trains and unreliable services on certain routes and at busy times’.

Soup owns its fleet of diesel powered trains. Each train in Region A has seven coaches with 70 passenger seats available per coach. In the less busy Region B, each train has six coaches each with 70 seats. As a condition of the licence, Soup runs a set number of services at both busy and quieter times in both regions. Soup has two larger rivals, both operating electric trains, which cause less harm to the environment than diesel powered trains. They run on the same routes in both regions.

The government regulates fares charged to passengers, which are the same per distance travelled for every operator in that region. The railway track, stations and other infrastructure are managed by the government which charges the operators a fee. There are several stations along the route which are only used by Soup trains and others where Soup trains do not stop at all.

Soup’s trains are 25 years old, originally purchased cheaply from an operator whose licence was withdrawn by the government. Soup believes the low price it paid is a key competitive advantage enabling them to steadily increase their return on capital employed, the company’s main performance measure, to a level well in excess of their rivals.

The shareholders are pleased with the growth in passenger numbers over the last five years, which is the other performance measure Soup uses.

Soup’s ageing trains spend increasing time undergoing preventative maintenance, safety checks or repairs. A recent television documentary also showed apparently poor conditions on board, such as defective heating and washroom facilities and dirty, torn seating. Passengers complained in the programme of difficulties finding a seat, the unreliability of accessing wireless internet services and even that the menu in the on-board cafe had not changed for five years.

Soup’s CEO responded that unreliable internet access arose from the rapid growth in passengers expecting to access the internet on trains. She said Soup had never received any formal complaints about the lack of choice in the on-board cafe, nor had she heard of a recent press report that Soup’s trains were badly maintained, so causing harm to the environment.

The CEO has asked you, as chief management accountant, for your advice. ‘In view of the government’s warning, we must develop performance measures balancing the needs of passengers with the requirements of the shareholders’, she has said. ‘I don’t want to know how to improve the actual performance of the business; that is the job of the operational managers, nor do I just want a list of suggested performance measures. Instead I need to know why these performance measures will help to improve the performance of Soup.’

The following data applies to Soup:

Region A Region B
Number of services per day
Peak times 4 4
Other times 6 8
Number of passengers per day
Peak times 2,500 1,400
Other times 2,450 1,850

Required:
(a) Advise the CEO on how the use of the balanced scorecard could improve the performance management system of Soup. (10 marks)