Topic: Divisional Performance Measurement

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  • 15 Marks

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

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

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)

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  • 6 Marks

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

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

Define the following concepts:

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

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  • 16 Marks

PM – Nov 2024 – L2 – Q6 – Divisional Performance Measurement

Comparative analysis of Owerri and Isiekenesi event centers based on financial performance metrics

Omegboje and company is a medium-scale outfit that specializes in the rental business in Owerri and Isiekenesi towns. The company operates a large event center in each city, supplying chairs, tables, and canopies for both outdoor and some indoor events.

Each event center manager has some independence in operations and earns a performance bonus of 10% of sales if they achieve more than the standard return on capital employed (ROCE) of 50%.

The following financial data is available for the two centers for the years ending December 31, 2020, and 2019:

Additional Information:

  1. Revenue is derived from rentals and ancillary services.
  2. Both centers have a cost of capital of 15%.
  3. Ignore taxation and inflation.

Required:

a. Discuss the relative performance of the two centers based on: i. Return on Capital Employed (ROCE) ii. Residual Income iii. Profit Margin iv. Current Ratio v. Quick Ratio vi. Gearing Ratio vii. Interest Cover
(7 Marks)

b. Compute the performance bonus for the centers (if any), showing your workings.
(4 Marks)

c. Briefly outline the role of a Management Accountant in project management.
(4 Marks)

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  • 20 Marks

PM – Nov 2014 – L2 – Q3 – Divisional Performance Measurement

Compare financial performance of Purity Nigeria Ltd. and Benchmark Co. Ltd using key financial ratios and offer strategic improvement recommendations.

Purity Nigeria Limited is a company that produces table water. The company’s board
plans to restructure its operations with the aim of boosting its market share and
profitability.

The financial results of Purity Nigeria Limited and Bench Mark Co. Limited, which is
the leader in the industry, are as follows:

Operating Statements for the year ended 31 December, 2013

Summarised Statements of Financial Position as at 31 December, 2013.

Required:

a. Compute the following performance indices for both companies:
i Profit margin
ii. Asset turnover
iii. Returns On Capital Employed (ROCE)
iv. Current ratio
v. Debt-equity ratio (5 Marks)

b. Compare and analyse the performance of the two companies computed in (a)
above and explain what the board of Purity Nigeria Limited needs to do to
achieve their objectives. (10 Marks)

c. What other non-financial measures can influence the decision of the board of
Purity Nigeria Limited? (5 Marks)

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  • 30 Marks

PM – Nov 2014 – L2 – Q1 – Divisional Performance Measurement

Analyze transfer pricing impact on divisional performance and group profitability with tax implications for cross-border divisions.

Naijax Group Limited has been in operation since 1980, playing a leading role in the automobile industry.

Division “X,” which is part of the group, manufactures only “265 by 16’’ Rim tyre, which it sells to external customers and also to Division “Y,” another member of the group. Naijax Group’s policy is that:

  • Divisions have the freedom to set transfer prices and choose their suppliers.
  • It uses Residual Income (RI) for performance appraisals.
  • The group’s cost of capital is 12% per annum.

The two divisions’ operating data are as follows:

Division X
Budgeted information for the coming year:
Maximum capacity 150,000 tyres
External sales 110,000 tyres
External selling price N35,000 per tyre
Variable cost N22,000 per tyre
Fixed costs N1,080,000,000
Capital employed N3,200,000,000
Target residual income N180,000,000

Division Y has found two other companies willing to supply tyres:

  • Adex Limited could supply at N28,000 per tyre, but only for annual orders in excess of 50,000 tyres.
  • Banaxa Limited could supply at N33,000 per tyre for any quantity ordered.

Required:

(a) If Division Y provisionally requests a quotation for 60,000 tyres from Division X for the coming year:

i. Determine the transfer price per tyre that Division X should quote in order to meet its residual income target. (9 Marks)

ii. Calculate the TWO prices that Division X would have to quote to Division Y if it becomes the group’s policy to quote transfer prices based on opportunity costs. (2 Marks)

(b) Evaluate the impact of the group’s current and proposed policies on the profits of Divisions X and Y and on group profit. (4 Marks)

c. Assume that Divisions X and Y are based in different countries and consequently pay taxes at different rates: Division X at 55% and Division Y at 25%. If Division X has now quoted a transfer price of N30,000 per tyre for 60,000 tyres, you are required to determine whether it is better for the group if Division Y purchases
60,000 tyres from Division X or from Adex Limited. (15 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 2020 – L2 – Q4 – Pricing Decisions

Analyze profitability of divisions and the effect of transfer pricing changes for Adeb Nigeria Limited.

Adeb Nigeria Limited has two divisions, Eastern and Northern divisions. Eastern division makes materials that are used to manufacture special blocks. It transfers some of these materials to the Northern division and sells some of the materials externally to other block manufacturers. Northern division makes special blocks from the materials and sells them to traders in building materials.

The production capacity of Eastern division is 10,000 tonnes per month. At present, sales are limited to 5,000 tonnes to external customers and 3,000 tonnes to Northern division.

The transfer price was agreed at ₦200 per tonne in line with the external sales trade price at 1st July which was the beginning of the budget year. From 1st December, however, strong competition in the market has reduced the market price for the materials to ₦180 per tonne.

The manager of the Northern division has suggested that the transfer price for the materials from Eastern division should be the same as for external customers. The manager of Eastern division rejected this suggestion on the basis that the original budget established the transfer price for the entire financial year.

From each tonne of materials, Northern division produces 10 blocks, which it sells at ₦40 per block. It would sell a further 20,000 blocks if the price were reduced to ₦32 per block.

Other relevant data are given below:

Division Eastern Northern
Variable cost per tonne ₦70 ₦60
Fixed cost per month ₦150,000 ₦60,000

The variable costs of Northern division exclude the transfer price of materials from Eastern division.

Required:
a. Prepare estimated profit statements for the month of December for each division and for Adeb Nigeria Limited as a whole, based on transfer prices of ₦200 per tonne and ₦180 per tonne, when producing at:
i. 80% capacity
ii. 100% capacity, assuming Northern division reduces the selling price to ₦32. (10 Marks)

b. Comment on the effect that might result from a change in the transfer price from ₦200 to ₦180. (5 Marks)

c. Suggest an alternative transfer price that would provide an incentive for Northern division to reduce the selling price and increase sales by 20,000 blocks a month. (5 Marks)

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  • 30 Marks

PM – May 2018 – L2 – Q1 – Divisional Performance Measurement and Transfer Pricing

Differentiate responsibility centres, explain divisional structure, recommend transfer prices, and consider qualitative factors.

DASET DRINKS NIGERIA PLC.
(30 MARKS)
Daset Drinks Nigeria Plc. has been operating in the Nigerian food and beverages
industry as an entity with three distinct factories across the country. One of the
factories bottles soft drink while the other two produce bottles and crown corks for
the soft drink factory.
The company has recently been experiencing problems with its performance
evaluation system across the three factories. Each factory manager is of the
opinion that his factory is the one contributing the most to the overall performance
of the company.
In a recent management retreat, the guest speaker, a performance management
expert, emphasised the need to develop Key Performance Indicators (KPI) for each
of the factories and departments in the company. According to him, this will
enhance performance evaluation of all the managers in the company and will also
make performance management easier. He suggested that the company should
adopt a divisional structure whereby each of the factories will become an
autonomous division with responsibilities for investment, revenues, profits and
costs.
At the last Executive Management meeting, after the retreat, the company‟s top
management decided to adopt the recommendations of the guest speaker. The top
management agreed transfer prices acceptable to each of the divisional managers
and also the needs to decide whether the two factories manufacturing bottles and
corks cocks could sell to external markets.
The top management has mandated you, as the company‟s management
accountant, to supply necessary data that will assist them in taking appropriate
decisions.

Financial data collected about the company‟s operations are as follows:
The costs and selling prices of the divisions are:

This includes costs of bottle and crown cork. To produce one bottle of soft drink
requires one bottle and one crown cork.
The bottling division has the choice to buy its bottle and crown cork requirements
from the external market.
The variable costs of production for external sales and internal transfers are the
same and bottles and crown corks are being transferred to the bottling division at
these costs.
For brand protection, the soft drink factory is not willing to buy bottles and crown
corks from any external supplier.
Required:
a. Differentiate among an investment centre, a profit centre, a revenue centre
and a cost centre, in a divisional organisation giving one example of each.
(8 Marks)

b. Explain a divisional structure, stating the problems associated with this type
of structure in an organisation. (8 Marks)

c. Advise the top management on the transfer prices that will maximise the
company‟s profit and be acceptable to the factory managers.
(10 Marks)
d. Discuss TWO qualitative factors that the top management needs to consider
in taking these decisions. (4 Marks)

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  • 20 Marks

PM – May 2019 – L2 – Q3 – Divisional Performance Measurement

Calculate and analyze ROCE for Peterpan's subsidiaries and discuss performance excluding intra-group transactions.

Peterpan Nigeria Limited is a holding company with two subsidiaries manufacturing similar products in different regions of the country. These are Peterpan (Eastern) Nigeria Limited and Peterpan (Western) Nigeria Limited. Return on capital employed (ROCE) is used as the group’s performance measure and is also used to determine divisional managers’ bonuses. The results of the two companies and of the holding company for the year ended 31 December, 2018, and the statement of financial position as at that date are as follows:

Item Western (₦000) Eastern (₦000) Peterpan (₦000)
Revenue 400,000 440,000 792,941
Cost of sales (340,000) (330,000) (630,000)
Gross profit 60,000 110,000 162,941
Administrative costs (20,000) (60,000) (80,000)
Interest payable (20,000) – (20,000)
Pre-tax profit 20,000 60,000 62,941

Non-current assets:

Item
Original cost 2,000,000 300,000 3,000,000
Accumulated depreciation (1,180,800) (320,000) (2,213,568)
Net book value 819,200 120,000 786,432
Net current assets 100,000 120,000 906,432
Total assets 919,200 906,432 1,825,632
Non-current borrowings 300,000 – 300,000
Shareholders’ fund 619,200 786,432 1,525,632
Capital employed 919,200 906,432 1,825,632

Additional Information:

  1. During the year, Eastern Limited sold goods to Western Limited that had cost Eastern Limited ₦20,000,000. The transactions relating to this sale have been eliminated from the holding company’s results stated above.
  2. Both companies use the same depreciation policy of 20% per annum on a reducing balance basis for their non-current assets. Neither company made any additions or disposals of non-current assets during the year.
  3. During the last board meeting of the holding company, it was decided that the holding company should impose a transfer pricing policy for transfers between the two subsidiaries.

Required:

a. Calculate the return on capital employed (ROCE) ratios for each of the two subsidiaries for the year and analyze these into their secondary ratio components of: i. Pre-Tax Profit % ii. Asset Turnover (3 Marks)

b. i. Calculate Eastern Limited’s gross profit margin on its internal sales and compare this to the gross profit margin on its external sales. (2 Marks)
ii. Discuss the performance of the two subsidiaries excluding the effects of the intra-group transactions. (9 Marks)

c. Explain THREE factors that management should consider when setting the transfer pricing policy. (6 Marks)
(Total 20 Marks)

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  • 20 Marks

PM – May 2019 – L2 – Q2 – Divisional Performance Measurement

Discuss the benefits of EVA and calculate it for Tees Nigeria Ltd based on provided financial data.

Peter Drucker opined that “until a business returns a profit that is greater than its cost of capital, it operates at a loss.” Therefore, experts have challenged accounting profit as a good measure of business value increase and proposed economic value added (EVA) as a better measure.

Tees Nigeria Limited has presented the following financial data for the year ended 31 December 2018:

Income Statement 2018:

Item ₦000
Profit before interest and tax 75,000
Interest cost (9,000)
Profit before tax 66,000
Tax at 30% (19,800)
Profit after tax 46,200
Dividends paid (30,000)
Retained profit 16,200

Statement of Financial Position 2018:

Item ₦000
Non-current assets 305,000
Net current assets 190,000
Total assets 495,000
Shareholders’ funds 395,000
Long-term debt 100,000
Capital employed 495,000

Notes:
(i) Capital employed at the beginning of the year was ₦420 million.
(ii) The company had non-capitalised leased assets of ₦24 million.
(iii) The estimated cost of equity was 10%, and the cost of debt was 7%.
(iv) The company’s target capital structure is 60% equity and 40% debt.
(v) Other non-cash expenses were ₦16 million.
(vi) Depreciation is equal to economic depreciation.

Required:
a. Discuss the perceived benefits of using EVA to measure business performance. (10 Marks)
b. Calculate the real economic profit of Tees Nigeria Limited using EVA. (10 Marks)

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  • 16 Marks

PM – Nov 2018 – L2 – Q2a and Q2b – Transfer Pricing

Calculate divisional profits and analyze the group impact under different demand scenarios and alternative sourcing options.

X and Y Divisions are two arms of the XY group of companies. X Division manufactures one type of component, which it sells to external customers and also to Y Division.

The following information relates to X Division:

  • Market price per component: N200
  • Variable cost per component: N105
  • Fixed costs: N1,375,000 per period
  • Demand from Y Division: 20,000 components per period
  • Capacity: 35,000 components per period

Y Division assembles another type of product, which it sells to external customers. Each unit of that product requires two of the components manufactured by X Division.

The following information relates to Y Division:

  • Selling price per unit: N800
  • Variable cost per unit:
    • Two components from X: 2 @ transfer price
    • Other variable costs: N250
  • Fixed costs: N900,000 per period
  • Demand: 10,000 units per period
  • Capacity: 10,000 units per period

Group Transfer Pricing Policy:

  • Transfers must be at opportunity cost.
  • Y must buy the components from X.

Required:

a. Calculate the profit for each division if the external demand per period for the components made by X Division is: i. 15,000 components ii. 19,000 components iii. 35,000 components

b. Calculate the financial impact on the Group if Y Division ignored the transfer pricing policy and purchased the 20,000 components it needs from an external supplier for N170 each. Your answer must consider the impact at each of the three levels of demand (15,000, 19,000, and 35,000 components) from external customers for the components manufactured by X Division.
(3 Marks)

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