Question Tag: ROI

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MA – Nov 2024 – L2- Q1b – Return on Investment (ROI)

Computation of ROI for different one-off transactions and advice on whether they should be undertaken.

Question

Dondo LTD is a manufacturing company based in Nsawam. The following data represents the budgeted performance of Dondo LTD for the year 2025:

	Amount (GH¢’000)
Profit	660
Plant and equipment (net of depreciation)	1,560
Working capital	750

Dondo LTD is considering undertaking the following separate one-off transactions:

A cash discount of GH¢16,000 will be offered to its customers annually. This will, on average, reduce the trade receivables figure by GH¢60,000.
An increase in average inventories by GH¢80,000 throughout the year. The increased inventory level is expected to increase sales, resulting in GH¢30,000 increased contribution per annum.
At the beginning of the year, the company will buy a plant worth GH¢360,000. This is expected to reduce operating costs by GH¢105,000. The plant has a five-year useful life with nil residual value.

Required:

i) Compute the ROI for each of the one-off transactions above.
ii) Advise Dondo LTD on whether the above one-off transactions should be carried out.

Answer

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Tags: Cost Control, Decision Making, Financial Performance, Investment Appraisal, ROI
Level: Level 2

Topic: Performance analysis
Series: Nov 2024

PM – Nov 2024 – L2 – Q7b – Divisional Performance Measurement

Evaluating division performance using ROI and residual income methods with adjusted cost of capital.

Question

Ngerige and Sons Limited has four operating divisions spread across four cities in Nigeria: Lagos, Kano, Gombe, and Enugu. These divisions are treated as investment centres for performance reporting purposes. The following information is available:

Particulars	Lagos	Kano	Gombe	Enugu
Divisional Investment (N)	10,000,000	4,000,000	3,000,000	7,000,000
Divisional Sales (N)	53,000,000	23,000,000	24,600,000	29,400,000
Divisional Variable Costs (N)	50,000,000	22,000,000	23,400,000	27,400,000
Specific Fixed Costs (N)	1,500,000	750,000	600,000	800,000

The company’s annual general fixed cost is N1,300,000, apportioned to divisions based on sales. The cost of capital for Ngerige and Sons Limited is 7.5%. Ignore taxation.

Required:

i. Evaluate the performance of the divisions using the following methods:

ROI method. (3 Marks)
Residual Income Method. (3 Marks)

ii. Re-evaluate the residual income situation for the company given an adjusted cost of capital of 10%. (3 Marks)

Answer

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Tags: Cost of Capital, Division Performance, Investment Centres, Profitability Ratios, Residual Income, ROI
Level: Level 2

Topic: Divisional Performance Measurement

PM – Nov 2024 – L2 – Q7a – Divisional Performance Measurement

Definitions of Responsibility Accounting, Investment Centre, Return on Investment (ROI), and Residual Income.

Question

Define the following concepts:

i. Responsibility accounting
ii. An investment centre
iii. Return on Investment (ROI)
iv. Residual income

Answer

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Tags: Investment Centre, Performance Measurement, Residual Income, Responsibility Accounting, ROI
Level: Level 2

Topic: Divisional Performance Measurement

PM – May 2015 – L2 – SB – Q5 – Balanced Scorecard

Evaluate the use of the Balanced Scorecard and analyze investment decisions for Carossi Limited using ROI and RI.

Question

CAROSSI Limited makes quality wooden products such as tables, chairs, benches, and doors. Historically, the company has used mainly financial performance measures to assess the performance of the company as a whole. The company’s Chief Executive Officer has just been informed of the ‘Balanced Scorecard Approach’ and is eager to learn more.

CAROSSI Limited has two Divisions X and Y, each with its own cost and revenue streams. Each Division is managed by a divisional manager who has the power to make all investment decisions within the Division. The cost of capital for both Divisions is 15 percent. Historically, investment decisions have been made by calculating the Return on Investment (ROI) of any opportunities, and presently, the return on investment of each Division is 18 percent.

A recently appointed manager for Division X strongly feels that using Residual Income (RI) to make investment decisions would result in better ‘goal congruence’ throughout the organisation.

Investment Details for Each Division:

	Division X	Division Y
Capital required for investment (₦m)	88.2	46.0
Revenue generated from investment (₦m)	46.4	28.1
Net profit margin (%)	30	35

The company is seeking to maximise shareholders’ wealth.

Required: a. Describe the Balanced Scorecard Approach to performance measurement. (8 Marks)
b. Determine both the return on investment and residual income of the new investment for each of the two divisions. Comment on these results and take into consideration the manager’s views about residual income. (7 Marks)

Answer

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Tags: Balanced Scorecard, Goal Congruence, Investment Appraisal, Residual Income, ROI
Level: Level 2

Topic: Balanced Scorecard
Series: MAY 2015

PM – Nov 2019 – L2 – Q5 – Pricing Decisions

Evaluate profitability and ROI under different transfer pricing schemes between Division A and B of Ezeabunafo Nigeria Ltd.

Question

Ezeabunafo Nigeria Limited, an aluminium company, has two divisions, A and B.
Division A manufactures a single uniform product, which is partly sold in the
external market and partly transferred to division B where it forms the major sub –
assembly for that division‟s product.
The unit cost for each division‟s product is as shown here under:

Past data shows that average of 10,000 units of its products are sold on the
external market each year by Division A at the standard price of N60.
In addition to the external sales, 5,000 units are transferred annually to Division B
at a transfer price of N58 per unit (as above). The transfer price is derived by
deducting variable selling and packaging expenses from the external price since
these expenses are not incurred for internal transfers.
Division B‟s manager disagrees with the basis used to set the transfer price. He
contends that the transfer price should be made at variable cost plus an agreed
(minimal) mark up. It is his view that under the present set-up, his division is
taking output that Division A would be unable to sell at the price of N60.
A study commissioned by the Marketing Director consequent on this disagreement
shows the following:

Division B‟s manager maintains that the study has buttressed his case and calls for
a transfer price of N24 which he points out, would give Division B a reasonable
contribution to its fixed overheads as well as enable B to earn a reasonable profit
which also leads to an enhanced company-wide output and profit performance.

Required:
a. Calculate the contribution at alternative selling prices shown in the study for Division A and identify the price that maximizes Division A’s profit. (6 Marks)
b. Calculate the contribution at alternative prices for Division B and determine if the current selling price of N180 maximizes the firm’s overall profit. (5 Marks)
c. Assuming a transfer price equal to Division A’s variable costs, calculate the contribution for Division B at alternative prices. (3 Marks)
d. Calculate the contribution per unit and comment on how the whole firm is affected under this situation. (3 Marks)
e. Evaluate the effect on company profits if Division B’s manager’s suggestion of a N24 transfer price is adopted. (3 Marks)

Answer

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Tags: Divisional Management, Profit Contribution, ROI, Transfer Pricing
Level: Level 2

Topic: Pricing Decisions
Series: NOV 2019

PM – Nov 2019 – L2 – Q3 – Pricing Decisions

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

Question

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)

Answer

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Tags: Divisional Performance, Profit, Residual Income, ROI, Transfer Pricing
Level: Level 2

Topic: Pricing Decisions
Series: NOV 2019

PM – May 2019 – L2 – Q7 – Pricing Decisions

Evaluates various pricing methods for a new product and calculates prices based on different strategies.

Question

Tetpack Nigerian Limited (TNL) produces various types of packaging products for the food industry. TNL has just introduced a new type of pack, and its marketing manager is considering how to penetrate the market with the pack. The following pricing strategies have been suggested:

i. Market skimming price
ii. Market penetration price
iii. Full cost plus price
iv. Return on investment price
v. Marginal cost plus price

The management accountant has provided the following data about the pack:

Non-current assets needed for the production of the pack: N2,000,000
Working capital requirements: N400,000
Expected annual sales volume: 40,000 units
Variable production costs: N60 per unit
Fixed production costs: N300,000 each year
Annual non-production costs: N100,000
Markup:
- Full cost plus price: 25%
- Marginal cost plus price: 40%
- Target return on investment: 10% per year

Required:
a. Discuss the above pricing methods and advise when each could be used. (10 Marks)

b. Calculate what the price of the pack should be if its price is based on:
i. Full cost plus pricing (1½ Marks)
ii. Marginal cost plus pricing (1½ Marks)
iii. Return on investment pricing (2 Marks)

Answer

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Tags: Cost Plus, Marginal Cost, Market Penetration, Market Skimming, Pricing Strategies, ROI
Level: Level 2

Topic: Pricing Decisions
Series: MAY 2019

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.

Question

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

Answer

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Tags: Divisional Performance, NPV, RI, ROI
Level: Level 2

Topic: Discounted cash flow, Divisional Performance
Series: MAR 2024

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.

Question

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.

Answer

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Tags: Divisional Performance, Investment Appraisal, RI, ROI
Level: Level 2

Topic: Divisional Performance
Series: MAR 2024

MA – July 2023 – L2 – Q1 – Performance analysis

This question involves explaining the controllability principle, calculating controllable profit, ROI, and RI, and analyzing the performance of two divisions.

Question

Kenkah Ltd provides buffer storage for many companies throughout the country. The company has two divisions, namely Abura and Keta. Each division is autonomous and makes its own long-term investment decisions.

Kenkah Ltd measures the performance of its divisions using Return on Investment (ROI), calculated using controllable profit and average divisional net assets. The company has a cost of capital of 12% but a targeted ROI of 18%. The divisional managers’ annual bonus is determined by the extent to which the ROI earned by the division exceeds the target.

At the beginning of the year, the two divisions, Abura and Keta, bought assets worth GH¢12.5 million and GH¢18.2 million respectively. The assets have a five-year life span with no residual value. The company uses the straight-line depreciation method. The other assets are being controlled by the head office.

Over the years, Kenkah Ltd has used ROI in evaluating the performance of managers. However, to discourage dysfunctional behavior, Kenkah Ltd is considering introducing Residual Income (RI) as a performance measure. Like ROI, RI is calculated using controllable profit and average divisional assets.

The current year’s draft operating statement is shown below:

	Abura (GH¢000)	Keta (GH¢000)
Sales	15,350	17,020
Less controllable Variable Cost	7,505	8,950
Contribution	7,845	8,070
Less Fixed Cost [i) & ii)]	6,335	6,910
Profit	1,510	1,160

Additional Information:
i) Included in fixed costs are the current year depreciation charges of GH¢3,125,000 and GH¢4,550,000 for division Abura and Keta, respectively. Twenty percent (20%) of the depreciation cost in each division is from assets owned and controlled by the head office.
ii) Head office allocates some of its overhead costs to the two divisions using activity-based costing. These costs have been included in the fixed costs and amounted to GH¢210,000 and GH¢230,000 for Abura and Keta, respectively.
iii) The Management Accountant stated at a recent board meeting that “Responsibility accounting is based on the application of the controllability principle.” Hence, he would resist any attempt by management to deviate from this basic principle.

Required:
a) Explain the “controllability principle” and why its application is difficult in practice.
(4 marks)

b) Calculate the current year controllable profit for both divisions of Kenkah Ltd.
(4 marks)

c) Calculate the current year ROI for each of the two divisions of Kenkah Ltd.
(3 marks)

d) Calculate the current year RI for each of the two divisions of Kenkah Ltd.
(4 marks)

e) Discuss the performance of the two divisions for the year.

Answer

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Tags: Controllability Principle, Performance Measurement, Responsibility Accounting, RI, ROI
Level: Level 2

Topic: Performance analysis
Series: JULY 2023

MA – Nov 2024 – L2- Q1b – Return on Investment (ROI)

Computation of ROI for different one-off transactions and advice on whether they should be undertaken.

Question

Dondo LTD is a manufacturing company based in Nsawam. The following data represents the budgeted performance of Dondo LTD for the year 2025:

	Amount (GH¢’000)
Profit	660
Plant and equipment (net of depreciation)	1,560
Working capital	750

Dondo LTD is considering undertaking the following separate one-off transactions:

A cash discount of GH¢16,000 will be offered to its customers annually. This will, on average, reduce the trade receivables figure by GH¢60,000.
An increase in average inventories by GH¢80,000 throughout the year. The increased inventory level is expected to increase sales, resulting in GH¢30,000 increased contribution per annum.
At the beginning of the year, the company will buy a plant worth GH¢360,000. This is expected to reduce operating costs by GH¢105,000. The plant has a five-year useful life with nil residual value.

Required:

i) Compute the ROI for each of the one-off transactions above.
ii) Advise Dondo LTD on whether the above one-off transactions should be carried out.

Answer

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Tags: Cost Control, Decision Making, Financial Performance, Investment Appraisal, ROI
Level: Level 2

Topic: Performance analysis
Series: Nov 2024

PM – Nov 2024 – L2 – Q7b – Divisional Performance Measurement

Evaluating division performance using ROI and residual income methods with adjusted cost of capital.

Question

Particulars	Lagos	Kano	Gombe	Enugu
Divisional Investment (N)	10,000,000	4,000,000	3,000,000	7,000,000
Divisional Sales (N)	53,000,000	23,000,000	24,600,000	29,400,000
Divisional Variable Costs (N)	50,000,000	22,000,000	23,400,000	27,400,000
Specific Fixed Costs (N)	1,500,000	750,000	600,000	800,000

The company’s annual general fixed cost is N1,300,000, apportioned to divisions based on sales. The cost of capital for Ngerige and Sons Limited is 7.5%. Ignore taxation.

Required:

i. Evaluate the performance of the divisions using the following methods:

ROI method. (3 Marks)
Residual Income Method. (3 Marks)

ii. Re-evaluate the residual income situation for the company given an adjusted cost of capital of 10%. (3 Marks)

Answer

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Tags: Cost of Capital, Division Performance, Investment Centres, Profitability Ratios, Residual Income, ROI
Level: Level 2

Topic: Divisional Performance Measurement

PM – Nov 2024 – L2 – Q7a – Divisional Performance Measurement

Definitions of Responsibility Accounting, Investment Centre, Return on Investment (ROI), and Residual Income.

Question

Define the following concepts:

i. Responsibility accounting
ii. An investment centre
iii. Return on Investment (ROI)
iv. Residual income

Answer

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Tags: Investment Centre, Performance Measurement, Residual Income, Responsibility Accounting, ROI
Level: Level 2

Topic: Divisional Performance Measurement

PM – May 2015 – L2 – SB – Q5 – Balanced Scorecard

Evaluate the use of the Balanced Scorecard and analyze investment decisions for Carossi Limited using ROI and RI.

Question

A recently appointed manager for Division X strongly feels that using Residual Income (RI) to make investment decisions would result in better ‘goal congruence’ throughout the organisation.

Investment Details for Each Division:

	Division X	Division Y
Capital required for investment (₦m)	88.2	46.0
Revenue generated from investment (₦m)	46.4	28.1
Net profit margin (%)	30	35

The company is seeking to maximise shareholders’ wealth.

Answer

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Tags: Balanced Scorecard, Goal Congruence, Investment Appraisal, Residual Income, ROI
Level: Level 2

Topic: Balanced Scorecard
Series: MAY 2015

PM – Nov 2019 – L2 – Q5 – Pricing Decisions

Evaluate profitability and ROI under different transfer pricing schemes between Division A and B of Ezeabunafo Nigeria Ltd.

Question

Answer

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Tags: Divisional Management, Profit Contribution, ROI, Transfer Pricing
Level: Level 2

Topic: Pricing Decisions
Series: NOV 2019

PM – Nov 2019 – L2 – Q3 – Pricing Decisions

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

Question

The following are for the month of November:

Answer

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Tags: Divisional Performance, Profit, Residual Income, ROI, Transfer Pricing
Level: Level 2

Topic: Pricing Decisions
Series: NOV 2019

PM – May 2019 – L2 – Q7 – Pricing Decisions

Evaluates various pricing methods for a new product and calculates prices based on different strategies.

Question

i. Market skimming price
ii. Market penetration price
iii. Full cost plus price
iv. Return on investment price
v. Marginal cost plus price

The management accountant has provided the following data about the pack:

Non-current assets needed for the production of the pack: N2,000,000
Working capital requirements: N400,000
Expected annual sales volume: 40,000 units
Variable production costs: N60 per unit
Fixed production costs: N300,000 each year
Annual non-production costs: N100,000
Markup:
- Full cost plus price: 25%
- Marginal cost plus price: 40%
- Target return on investment: 10% per year

Required:
a. Discuss the above pricing methods and advise when each could be used. (10 Marks)

Answer

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Tags: Cost Plus, Marginal Cost, Market Penetration, Market Skimming, Pricing Strategies, ROI
Level: Level 2

Topic: Pricing Decisions
Series: MAY 2019

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.

Question

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

Answer

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Tags: Divisional Performance, NPV, RI, ROI
Level: Level 2

Topic: Discounted cash flow, Divisional Performance
Series: MAR 2024

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.

Question

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

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.

Answer

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Tags: Divisional Performance, Investment Appraisal, RI, ROI
Level: Level 2

Topic: Divisional Performance
Series: MAR 2024

MA – July 2023 – L2 – Q1 – Performance analysis

This question involves explaining the controllability principle, calculating controllable profit, ROI, and RI, and analyzing the performance of two divisions.

Question

The current year’s draft operating statement is shown below:

	Abura (GH¢000)	Keta (GH¢000)
Sales	15,350	17,020
Less controllable Variable Cost	7,505	8,950
Contribution	7,845	8,070
Less Fixed Cost [i) & ii)]	6,335	6,910
Profit	1,510	1,160

Required:
a) Explain the “controllability principle” and why its application is difficult in practice.
(4 marks)

b) Calculate the current year controllable profit for both divisions of Kenkah Ltd.
(4 marks)

c) Calculate the current year ROI for each of the two divisions of Kenkah Ltd.
(3 marks)

d) Calculate the current year RI for each of the two divisions of Kenkah Ltd.
(4 marks)

e) Discuss the performance of the two divisions for the year.

Answer

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Tags: Controllability Principle, Performance Measurement, Responsibility Accounting, RI, ROI
Level: Level 2

Topic: Performance analysis
Series: JULY 2023

Question Tag: ROI

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MA – Nov 2024 – L2- Q1b – Return on Investment (ROI)

Computation of ROI for different one-off transactions and advice on whether they should be undertaken.

PM – Nov 2024 – L2 – Q7b – Divisional Performance Measurement

Evaluating division performance using ROI and residual income methods with adjusted cost of capital.

PM – Nov 2024 – L2 – Q7a – Divisional Performance Measurement

Definitions of Responsibility Accounting, Investment Centre, Return on Investment (ROI), and Residual Income.

PM – May 2015 – L2 – SB – Q5 – Balanced Scorecard

Evaluate the use of the Balanced Scorecard and analyze investment decisions for Carossi Limited using ROI and RI.

PM – Nov 2019 – L2 – Q5 – Pricing Decisions

Evaluate profitability and ROI under different transfer pricing schemes between Division A and B of Ezeabunafo Nigeria Ltd.

PM – Nov 2019 – L2 – Q3 – Pricing Decisions

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

PM – May 2019 – L2 – Q7 – Pricing Decisions

Evaluates various pricing methods for a new product and calculates prices based on different strategies.

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.

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.

MA – July 2023 – L2 – Q1 – Performance analysis

This question involves explaining the controllability principle, calculating controllable profit, ROI, and RI, and analyzing the performance of two divisions.

MA – Nov 2024 – L2- Q1b – Return on Investment (ROI)

Computation of ROI for different one-off transactions and advice on whether they should be undertaken.

PM – Nov 2024 – L2 – Q7b – Divisional Performance Measurement

Evaluating division performance using ROI and residual income methods with adjusted cost of capital.

PM – Nov 2024 – L2 – Q7a – Divisional Performance Measurement

Definitions of Responsibility Accounting, Investment Centre, Return on Investment (ROI), and Residual Income.

PM – May 2015 – L2 – SB – Q5 – Balanced Scorecard

Evaluate the use of the Balanced Scorecard and analyze investment decisions for Carossi Limited using ROI and RI.

PM – Nov 2019 – L2 – Q5 – Pricing Decisions

Evaluate profitability and ROI under different transfer pricing schemes between Division A and B of Ezeabunafo Nigeria Ltd.

PM – Nov 2019 – L2 – Q3 – Pricing Decisions

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

PM – May 2019 – L2 – Q7 – Pricing Decisions

Evaluates various pricing methods for a new product and calculates prices based on different strategies.

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.

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.

MA – July 2023 – L2 – Q1 – Performance analysis

This question involves explaining the controllability principle, calculating controllable profit, ROI, and RI, and analyzing the performance of two divisions.

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