Question Tag: Divisional Performance

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  • 15 Marks

PM – May 2024 – L2 – SC – Q5 – Divisional Performance Measurement

Calculation of transfer prices and performance appraisal in a holding company.

Zona Tango (ZT) plc is a holding company with four divisions, including Alba and Beta Divisions. Alba Division produces a component that it sells externally, and can also transfer to other divisions within the group.

Beta Division uses the components from Alba Division as a raw material for its final product. The division can also obtain the components from external suppliers. The components, when obtained from Alba Division, undergo further processing at a cost of ₦4.50 per unit before they are sold to the external market.

The Board of Directors, in order to implement a new Appraisal Review, has set up a performance scheme for the divisional managers. A performance target for the next financial year has been set, and the following budgeted information relating to the two divisions has been prepared:

Beta Division has asked Alba Division to quote a transfer price for units of the components.

Required:
a. Calculate the transfer price per unit which Alba Division should quote to Beta Division in order that its budgeted residual income target will be achieved. (3 Marks)
b. Calculate the selling price per unit which Beta Division should quote to the external market in order that its budgeted residual income target will be achieved, based on the transfer price quotation. State clearly your assumptions. (3 Marks)
c. Explain why the transfer price calculated in (a) may lead to sub-optimal decision-making from the point of view of ZT plc, taken as a whole. (5 Marks)
d. In what circumstances will a negotiated transfer price be used instead of a market-based price? (4 Marks)

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  • 20 Marks

PM – Nov 2019 – L2 – Q3 – Pricing Decisions

Evaluate divisional and company profit, ROI, and RI for Rinc Nigeria Ltd.

Rinc Nigeria Limited has two divisions, A and B. Division A specializes in the manufacture of a special part of a product while Division B completes the production and sells the final product. Division A also sells its components to third parties, and Division B can buy parts from external suppliers. Both divisions are profit centers.

The following are for the month of November:

Required:
a. Calculate the profit made by each division and the company as a whole for November. (10 Marks)
b. Calculate the ROI and RI of the divisions and the company. (5 Marks)
c. Discuss the advantages and disadvantages of ROI and RI as parameters for appraising divisional performance. (5 Marks)

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  • 20 Marks

PM – Nov 2020 – L2 – Q6 – Divisional Performance Measurement

Evaluate the performance of Lapez's divisions using ROCE and other performance measures and calculate the NPV of the proposed investment.

Lapez operates a chain of health and fitness clubs, located in state capitals in Nigeria. For easy administration, the clubs are structured into two divisions, the Northern and the Southern divisions. Each division has a General Manager who is responsible for revenue, cost, and investment decisions at their clubs. A bonus is awarded each year to the General Manager that generates the higher return on capital employed (ROCE).

The following summary information shows the results of the divisions for the past two years:

Year Ending 31st December Northern (2018) Southern (2018) Northern (2017) Southern (2017)
Revenue (N000) 2,700 3,720 2,850 3,375
Staff Costs (N000) 1,725 2,145 1,770 1,965
Other Operating Costs (N000) 690 1,012 750 930
Operating Profit (N000) 285 563 330 480
Capital Employed (N000) 750 1,350 1,125 1,800
Avg. Number of Members 6,880 9,425 7,050 8,320

Notes:

  1. Revenue is largely comprised of income from membership fees.
  2. Lapez uses the net book value of non-current assets as the capital employed. The capital employed figures in the table are the net book value of non-current assets for each division at the end of the year.
  3. Non-current assets are depreciated on a straight-line basis over five years with no residual value. No additions or disposals of non-current assets occurred in 2017 and 2018.
  4. Both divisions have a cost of capital of 15%.
  5. Ignore taxation and inflation.

However, investigations by Lapez’s management revealed that at the end of 2017, the General Manager of the Southern division rejected the opportunity to acquire a new building and equipment to set up a new fitness club at a total cost of ₦1,200,000. The building could have been purchased for ₦525,000, and it is assumed that the building would retain its value for five years, with no depreciation charged. The equipment would have cost ₦675,000 and would have been depreciated over five years according to Lapez’s policy. The investment would have occurred on January 1, 2018.

The forecasted annual profit and number of members for the proposed new club were as follows:

Description N000
Revenue 1,012.5
Staff Costs (556.5)
Other Operating Costs (incl. depreciation) (240.0)
Operating Profit 216.0
Avg. Number of Members 2,100

It is Lapez’s policy that investments of this type be appraised over five years using net present value (NPV).

Required:

a. Discuss the relative performance of the two divisions using Return on Capital Employed (ROCE) and TWO other performance measures that you think are appropriate. (15 Marks)

b. Calculate the net present value (NPV) of the investment. Ignore taxation and inflation. (5 Marks)

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  • 15 Marks

PM – May 2019 – L2 – Q5 – Transfer Pricing

Profitability analysis for two divisions, including transfer pricing and external supplier impacts.

TK is a company that produces toy television sets targeting children of the elite. The company has two divisions, Division S and Division B. Division S manufactures components for the televisions and sells components to Division B and to external customers. Division B uses five of the components in each of the toy television sets that it manufactures and sells television sets directly to external customers.

Division S
Budgeted variable manufacturing cost per component (N):

  • Direct material: 140
  • Direct labour: 180
  • Variable overhead: 120

Additional Information:

  • Fixed costs: N5,600,000
  • Production capacity: 175,000 components
  • External demand: 150,000 components
  • Potential demand from Division B: 80,000 components
  • Anticipated external market price for a component: N500

Division B

  • Sales price: N4,500
  • Budgeted variable manufacturing cost per television (N):
    • Direct material: 400
    • Direct labour: 620
    • Variable overhead: 160

Each toy television set produced needs five components. Fixed costs are budgeted to be N14,600,000 for next year. Annual sales of the toy television sets are expected to be 16,000 units.

Transfer Pricing Policy:

  • Transfer prices are set at opportunity cost.
  • Division S must satisfy the demand of Division B before selling components externally.
  • Division B is allowed to purchase components from Division S or from external suppliers.

Required:
a. Assuming that Division B buys all the components it requires from Division S:
Prepare a profit statement for each division detailing sales and costs, showing external sales and internal company transfers separately where appropriate. (6 Marks)

b. A specialist external supplier has approached Division B and offered to supply 80,000 components at a price of N420 each. The components fulfil the same function as those manufactured by Division S. The manager of Division B has accepted the offer and agreed to buy all the components it requires from this supplier:
i. Produce a revised profit statement for each division and for the total TK company.
ii. Division S has just received an enquiry from a new customer for the production of 25,000 components. The manager of Division S requires a total profit for the year for the division of N4,500,000.

  • Calculate the minimum price per component to sell the 25,000 components to the new customer that would enable the manager of Division S to meet the profit target. (4 Marks)

Note: This order will have no effect on the divisional fixed costs and no impact on the 150,000 components Division S sells to its existing external customers at N500 per component. Division B will continue to purchase the 80,000 components it requires from the specialist external supplier.

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  • 20 Marks

PM – Mar/Jul 2020 – L2 – Q5 – Transfer Pricing for Olascom Nigeria Limited

Calculation of the optimal transfer price for products between divisions at Olascom Nigeria Limited and evaluation of divisional performance.

Olascom Nigeria Limited has two operating divisions, Western division and Eastern division that are treated as profit centres for the purpose of performance reporting. Western division makes two products, Tot and Tal. Tot is sold to external customers for ₦310 per unit. Tal is a part-finished item that is sold only to Eastern division. Eastern division can obtain the part-finished item from either Western division or from an external supplier. The external supplier charges a price of ₦275 per unit.

The production capacity of Western division is measured in total units of output of Tot and Tal. Each unit requires the same direct labour time. The costs of production in Western division are as follows:

Required:
a. What is an optimal transfer price? (4 Marks)
b. What would be the optimal transfer price for Tal if there is spare production capacity in Western division? (4 Marks)
c. What would be the optimal transfer price for Tal if Western division is operating at full capacity due to a limited availability of direct labour, and there is unsatisfied external demand for Tot? (7 Marks)
d. Discuss two methods that can be used to evaluate performance of divisions that operate as investment centres,
(5 Marks)

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  • 20 Marks

PM – Mar/Jul 2020 – L1 – SB – Q2 – Budgetary Process and Behavioural Problems for Toby Nigeria

Discussion on budgeting and behavioral issues at Toby Nigeria Limited and redrafting of a budget statement.

Toby Nigeria Limited is a publishing company established in the early 1970s. The company has recently been taken over by Superior Quality Limited – a multinational company operating in Europe.
Mr. Edet Akpan, a staff of Superior Quality Limited, has been sent from the company’s headquarters to review, among other things, the budgeting and reporting system used by Toby Nigeria Limited.
During his visit to all the departments, he discovered that monthly budgets are prepared for each department in the company. Upon request, the last budget statement for the School Stationery Production Department (SSP) for period V was presented to him.
The budget statement presented was as follows:
Budget statement for period V
Department: SSP Department

Mr Tola Ademola, the School Stationery Manager, revealed that the budget statement presented was based on 40,000 units with a standard labour content of 3 hours per unit.
Mr. Akpan observed that Tola was not in any way enthusiastic about the budget system. He saw it as a pressure system imposed by the company’s top management to indict some of the managers. He pointed out that the system was hurriedly introduced by High Flyer Consults, about twelve months ago. The consultant never took time to talk to the managers or provide explanation that
could assist users to understand the system. The experienced School Stationery Manager was doubtful about the competence of the consultant. He was of the
opinion that the system introduced in Toby Nigeria Limited was either a ready-made one developed for another company or that the consultant did not understand the system well enough to give him the needed confidence to educate the users. He concluded by stating that he was sure his department made a loss as
against the positive figure recorded in the report and there was the possibility of reporting a loss at another period when profit was actually made. The situation reported above cuts across virtually all the departments and so the need to nip the situation in the bud became very urgent.
The task of making budgeting system more useful and acceptable in a biased environment like this, no doubt, seems difficult therefore, Mr. Akpan has requested from you an advice that will assist him in getting out of the woods.

Required:
a. Redraft the budget statement in a more informative manner. (12 Marks)
b. Discuss the behavioral problems brought out in this situation. (4 Marks)
c. Discuss the steps Mr. Akpan should take to remedy the situation. (4 Marks)

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  • 5 Marks

MA – Mar 2024 – L2 – Q1b – Divisional performance | Discounted Cash Flow

This question explains why the divisional manager may reject an option with a higher NPV and discusses board acceptability.

The performance bonus of the fragrance divisional manager is linked to Return on Investment (ROI) and Residual Income (RI) and has an impact on the calculation of retirement benefits. The manager is due to retire at the beginning of Year 3.

Required:
Explain why the fragrance Divisional Manager will not invest in the option showing the higher NPV and comment on whether it will be acceptable to the Board

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  • 10 Marks

MA – Mar 2024 – L2 – Q1a – Divisional performance

This question requires calculating ROI and RI for two investment options and choosing the best based on these performance metrics.

The Board of Otmost Beauty Ltd, a beauty care production company, is planning to introduce a new product. The Board has tasked the Divisional Manager of the fragrance division to evaluate two options to buy a production plant. Both options will have the same capacity and expected life of four years, but they will differ in capital costs and expected net cash flows as shown in the table below:

Option Option 1 (GH¢ million) Option 2 (GH¢ million)
Initial capital investment year 0 640 520
Net cash flows (before tax)
Year 1 240 260
Year 2 240 220
Year 3 240 150
Year 4 240 100
Net present value at 16% p.a 31.6 19.0

All divisions of the company are expected to generate pre-tax returns on divisional investments in excess of 16% per annum, which the fragrance division currently is just managing to achieve. Anything less than 16% would make the divisional managers ineligible for the annual performance bonus.

The performance bonus is linked to Return on Investment (ROI) and Residual Income (RI) and also has an impact on the calculation of retirement benefits, as the retirement benefits take into consideration the performance bonus earned during the two preceding years. The manager of the fragrance division is due to retire at the beginning of Year 3.

In calculating divisional returns, divisional assets are valued at the net book values at the beginning of the year. Depreciation is charged on a straight line basis with nil residual value.

Required:
i) Calculate the ROI and RI for years 1 to 4 and select the best option from the point of view of the fragrance division based on ROI and RI criteria.

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  • 3 Marks

MA – Dec 2023 – L2 – Q1c – Divisional performance

This question asks for a comparison between profit centers and investment centers in management accounting.

State ONE (1) similarity and TWO (2) differences between a Profit centre and an Investment centre.

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  • 15 Marks

MA – Dec 2023 – L2 – Q1a – Divisional performance

This question assesses the ROI and RI of two divisions, Ken and Yon, and compares their performance.

Ken and Yon are two divisions of a large company that operate in similar markets. The divisions are treated as investment centres, and every month each division prepares an operating statement and submits it to the parent company. Operating statements for the two divisions for October are stated below:

Operating Statements for October Ken (GH¢000) Yon (GH¢000)
Sales revenue 900 555
Variable costs 345 312
Controllable fixed costs (includes depreciation on division assets) 433 222
Uncontrollable apportioned central costs 15 5
Divisional net assets for the year 9,760 1,260

The company currently has a target return on capital of 12% per annum. However, the company believes its cost of capital is likely to rise and it is considering increasing the target return on capital. Currently, the performance of each division and the divisional management are assessed primarily based on Return on Investment (ROI) using controllable profit.

Required:

i) Calculate the annualised Return on Investment (ROI) for divisions Ken and Yon, and discuss their relative performances. (6 marks)
ii) Calculate the annualised Residual Income (RI) using controllable profit for divisions Ken and Yon, and evaluate their division’s performances. (6 marks)
iii) Using appropriate ratios, evaluate the efficiency of the two divisions. (3 marks)

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  • 15 Marks

PM – May 2024 – L2 – SC – Q5 – Divisional Performance Measurement

Calculation of transfer prices and performance appraisal in a holding company.

Zona Tango (ZT) plc is a holding company with four divisions, including Alba and Beta Divisions. Alba Division produces a component that it sells externally, and can also transfer to other divisions within the group.

Beta Division uses the components from Alba Division as a raw material for its final product. The division can also obtain the components from external suppliers. The components, when obtained from Alba Division, undergo further processing at a cost of ₦4.50 per unit before they are sold to the external market.

The Board of Directors, in order to implement a new Appraisal Review, has set up a performance scheme for the divisional managers. A performance target for the next financial year has been set, and the following budgeted information relating to the two divisions has been prepared:

Beta Division has asked Alba Division to quote a transfer price for units of the components.

Required:
a. Calculate the transfer price per unit which Alba Division should quote to Beta Division in order that its budgeted residual income target will be achieved. (3 Marks)
b. Calculate the selling price per unit which Beta Division should quote to the external market in order that its budgeted residual income target will be achieved, based on the transfer price quotation. State clearly your assumptions. (3 Marks)
c. Explain why the transfer price calculated in (a) may lead to sub-optimal decision-making from the point of view of ZT plc, taken as a whole. (5 Marks)
d. In what circumstances will a negotiated transfer price be used instead of a market-based price? (4 Marks)

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  • 20 Marks

PM – Nov 2019 – L2 – Q3 – Pricing Decisions

Evaluate divisional and company profit, ROI, and RI for Rinc Nigeria Ltd.

Rinc Nigeria Limited has two divisions, A and B. Division A specializes in the manufacture of a special part of a product while Division B completes the production and sells the final product. Division A also sells its components to third parties, and Division B can buy parts from external suppliers. Both divisions are profit centers.

The following are for the month of November:

Required:
a. Calculate the profit made by each division and the company as a whole for November. (10 Marks)
b. Calculate the ROI and RI of the divisions and the company. (5 Marks)
c. Discuss the advantages and disadvantages of ROI and RI as parameters for appraising divisional performance. (5 Marks)

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  • 20 Marks

PM – Nov 2020 – L2 – Q6 – Divisional Performance Measurement

Evaluate the performance of Lapez's divisions using ROCE and other performance measures and calculate the NPV of the proposed investment.

Lapez operates a chain of health and fitness clubs, located in state capitals in Nigeria. For easy administration, the clubs are structured into two divisions, the Northern and the Southern divisions. Each division has a General Manager who is responsible for revenue, cost, and investment decisions at their clubs. A bonus is awarded each year to the General Manager that generates the higher return on capital employed (ROCE).

The following summary information shows the results of the divisions for the past two years:

Year Ending 31st December Northern (2018) Southern (2018) Northern (2017) Southern (2017)
Revenue (N000) 2,700 3,720 2,850 3,375
Staff Costs (N000) 1,725 2,145 1,770 1,965
Other Operating Costs (N000) 690 1,012 750 930
Operating Profit (N000) 285 563 330 480
Capital Employed (N000) 750 1,350 1,125 1,800
Avg. Number of Members 6,880 9,425 7,050 8,320

Notes:

  1. Revenue is largely comprised of income from membership fees.
  2. Lapez uses the net book value of non-current assets as the capital employed. The capital employed figures in the table are the net book value of non-current assets for each division at the end of the year.
  3. Non-current assets are depreciated on a straight-line basis over five years with no residual value. No additions or disposals of non-current assets occurred in 2017 and 2018.
  4. Both divisions have a cost of capital of 15%.
  5. Ignore taxation and inflation.

However, investigations by Lapez’s management revealed that at the end of 2017, the General Manager of the Southern division rejected the opportunity to acquire a new building and equipment to set up a new fitness club at a total cost of ₦1,200,000. The building could have been purchased for ₦525,000, and it is assumed that the building would retain its value for five years, with no depreciation charged. The equipment would have cost ₦675,000 and would have been depreciated over five years according to Lapez’s policy. The investment would have occurred on January 1, 2018.

The forecasted annual profit and number of members for the proposed new club were as follows:

Description N000
Revenue 1,012.5
Staff Costs (556.5)
Other Operating Costs (incl. depreciation) (240.0)
Operating Profit 216.0
Avg. Number of Members 2,100

It is Lapez’s policy that investments of this type be appraised over five years using net present value (NPV).

Required:

a. Discuss the relative performance of the two divisions using Return on Capital Employed (ROCE) and TWO other performance measures that you think are appropriate. (15 Marks)

b. Calculate the net present value (NPV) of the investment. Ignore taxation and inflation. (5 Marks)

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  • 15 Marks

PM – May 2019 – L2 – Q5 – Transfer Pricing

Profitability analysis for two divisions, including transfer pricing and external supplier impacts.

TK is a company that produces toy television sets targeting children of the elite. The company has two divisions, Division S and Division B. Division S manufactures components for the televisions and sells components to Division B and to external customers. Division B uses five of the components in each of the toy television sets that it manufactures and sells television sets directly to external customers.

Division S
Budgeted variable manufacturing cost per component (N):

  • Direct material: 140
  • Direct labour: 180
  • Variable overhead: 120

Additional Information:

  • Fixed costs: N5,600,000
  • Production capacity: 175,000 components
  • External demand: 150,000 components
  • Potential demand from Division B: 80,000 components
  • Anticipated external market price for a component: N500

Division B

  • Sales price: N4,500
  • Budgeted variable manufacturing cost per television (N):
    • Direct material: 400
    • Direct labour: 620
    • Variable overhead: 160

Each toy television set produced needs five components. Fixed costs are budgeted to be N14,600,000 for next year. Annual sales of the toy television sets are expected to be 16,000 units.

Transfer Pricing Policy:

  • Transfer prices are set at opportunity cost.
  • Division S must satisfy the demand of Division B before selling components externally.
  • Division B is allowed to purchase components from Division S or from external suppliers.

Required:
a. Assuming that Division B buys all the components it requires from Division S:
Prepare a profit statement for each division detailing sales and costs, showing external sales and internal company transfers separately where appropriate. (6 Marks)

b. A specialist external supplier has approached Division B and offered to supply 80,000 components at a price of N420 each. The components fulfil the same function as those manufactured by Division S. The manager of Division B has accepted the offer and agreed to buy all the components it requires from this supplier:
i. Produce a revised profit statement for each division and for the total TK company.
ii. Division S has just received an enquiry from a new customer for the production of 25,000 components. The manager of Division S requires a total profit for the year for the division of N4,500,000.

  • Calculate the minimum price per component to sell the 25,000 components to the new customer that would enable the manager of Division S to meet the profit target. (4 Marks)

Note: This order will have no effect on the divisional fixed costs and no impact on the 150,000 components Division S sells to its existing external customers at N500 per component. Division B will continue to purchase the 80,000 components it requires from the specialist external supplier.

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  • 20 Marks

PM – Mar/Jul 2020 – L2 – Q5 – Transfer Pricing for Olascom Nigeria Limited

Calculation of the optimal transfer price for products between divisions at Olascom Nigeria Limited and evaluation of divisional performance.

Olascom Nigeria Limited has two operating divisions, Western division and Eastern division that are treated as profit centres for the purpose of performance reporting. Western division makes two products, Tot and Tal. Tot is sold to external customers for ₦310 per unit. Tal is a part-finished item that is sold only to Eastern division. Eastern division can obtain the part-finished item from either Western division or from an external supplier. The external supplier charges a price of ₦275 per unit.

The production capacity of Western division is measured in total units of output of Tot and Tal. Each unit requires the same direct labour time. The costs of production in Western division are as follows:

Required:
a. What is an optimal transfer price? (4 Marks)
b. What would be the optimal transfer price for Tal if there is spare production capacity in Western division? (4 Marks)
c. What would be the optimal transfer price for Tal if Western division is operating at full capacity due to a limited availability of direct labour, and there is unsatisfied external demand for Tot? (7 Marks)
d. Discuss two methods that can be used to evaluate performance of divisions that operate as investment centres,
(5 Marks)

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  • 20 Marks

PM – Mar/Jul 2020 – L1 – SB – Q2 – Budgetary Process and Behavioural Problems for Toby Nigeria

Discussion on budgeting and behavioral issues at Toby Nigeria Limited and redrafting of a budget statement.

Toby Nigeria Limited is a publishing company established in the early 1970s. The company has recently been taken over by Superior Quality Limited – a multinational company operating in Europe.
Mr. Edet Akpan, a staff of Superior Quality Limited, has been sent from the company’s headquarters to review, among other things, the budgeting and reporting system used by Toby Nigeria Limited.
During his visit to all the departments, he discovered that monthly budgets are prepared for each department in the company. Upon request, the last budget statement for the School Stationery Production Department (SSP) for period V was presented to him.
The budget statement presented was as follows:
Budget statement for period V
Department: SSP Department

Mr Tola Ademola, the School Stationery Manager, revealed that the budget statement presented was based on 40,000 units with a standard labour content of 3 hours per unit.
Mr. Akpan observed that Tola was not in any way enthusiastic about the budget system. He saw it as a pressure system imposed by the company’s top management to indict some of the managers. He pointed out that the system was hurriedly introduced by High Flyer Consults, about twelve months ago. The consultant never took time to talk to the managers or provide explanation that
could assist users to understand the system. The experienced School Stationery Manager was doubtful about the competence of the consultant. He was of the
opinion that the system introduced in Toby Nigeria Limited was either a ready-made one developed for another company or that the consultant did not understand the system well enough to give him the needed confidence to educate the users. He concluded by stating that he was sure his department made a loss as
against the positive figure recorded in the report and there was the possibility of reporting a loss at another period when profit was actually made. The situation reported above cuts across virtually all the departments and so the need to nip the situation in the bud became very urgent.
The task of making budgeting system more useful and acceptable in a biased environment like this, no doubt, seems difficult therefore, Mr. Akpan has requested from you an advice that will assist him in getting out of the woods.

Required:
a. Redraft the budget statement in a more informative manner. (12 Marks)
b. Discuss the behavioral problems brought out in this situation. (4 Marks)
c. Discuss the steps Mr. Akpan should take to remedy the situation. (4 Marks)

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  • 5 Marks

MA – Mar 2024 – L2 – Q1b – Divisional performance | Discounted Cash Flow

This question explains why the divisional manager may reject an option with a higher NPV and discusses board acceptability.

The performance bonus of the fragrance divisional manager is linked to Return on Investment (ROI) and Residual Income (RI) and has an impact on the calculation of retirement benefits. The manager is due to retire at the beginning of Year 3.

Required:
Explain why the fragrance Divisional Manager will not invest in the option showing the higher NPV and comment on whether it will be acceptable to the Board

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  • 10 Marks

MA – Mar 2024 – L2 – Q1a – Divisional performance

This question requires calculating ROI and RI for two investment options and choosing the best based on these performance metrics.

The Board of Otmost Beauty Ltd, a beauty care production company, is planning to introduce a new product. The Board has tasked the Divisional Manager of the fragrance division to evaluate two options to buy a production plant. Both options will have the same capacity and expected life of four years, but they will differ in capital costs and expected net cash flows as shown in the table below:

Option Option 1 (GH¢ million) Option 2 (GH¢ million)
Initial capital investment year 0 640 520
Net cash flows (before tax)
Year 1 240 260
Year 2 240 220
Year 3 240 150
Year 4 240 100
Net present value at 16% p.a 31.6 19.0

All divisions of the company are expected to generate pre-tax returns on divisional investments in excess of 16% per annum, which the fragrance division currently is just managing to achieve. Anything less than 16% would make the divisional managers ineligible for the annual performance bonus.

The performance bonus is linked to Return on Investment (ROI) and Residual Income (RI) and also has an impact on the calculation of retirement benefits, as the retirement benefits take into consideration the performance bonus earned during the two preceding years. The manager of the fragrance division is due to retire at the beginning of Year 3.

In calculating divisional returns, divisional assets are valued at the net book values at the beginning of the year. Depreciation is charged on a straight line basis with nil residual value.

Required:
i) Calculate the ROI and RI for years 1 to 4 and select the best option from the point of view of the fragrance division based on ROI and RI criteria.

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  • 3 Marks

MA – Dec 2023 – L2 – Q1c – Divisional performance

This question asks for a comparison between profit centers and investment centers in management accounting.

State ONE (1) similarity and TWO (2) differences between a Profit centre and an Investment centre.

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  • 15 Marks

MA – Dec 2023 – L2 – Q1a – Divisional performance

This question assesses the ROI and RI of two divisions, Ken and Yon, and compares their performance.

Ken and Yon are two divisions of a large company that operate in similar markets. The divisions are treated as investment centres, and every month each division prepares an operating statement and submits it to the parent company. Operating statements for the two divisions for October are stated below:

Operating Statements for October Ken (GH¢000) Yon (GH¢000)
Sales revenue 900 555
Variable costs 345 312
Controllable fixed costs (includes depreciation on division assets) 433 222
Uncontrollable apportioned central costs 15 5
Divisional net assets for the year 9,760 1,260

The company currently has a target return on capital of 12% per annum. However, the company believes its cost of capital is likely to rise and it is considering increasing the target return on capital. Currently, the performance of each division and the divisional management are assessed primarily based on Return on Investment (ROI) using controllable profit.

Required:

i) Calculate the annualised Return on Investment (ROI) for divisions Ken and Yon, and discuss their relative performances. (6 marks)
ii) Calculate the annualised Residual Income (RI) using controllable profit for divisions Ken and Yon, and evaluate their division’s performances. (6 marks)
iii) Using appropriate ratios, evaluate the efficiency of the two divisions. (3 marks)

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