Topic: Divisional Performance

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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 – Dec 2023 – L2 – Q1b – Divisional Performance

This question defines the concept of responsibility accounting in management accounting systems.

Question

Define the term responsibility accounting.

Answer

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Tags: Accounting Systems, Responsibility Accounting
Level: Level 2

Topic: Divisional Performance
Series: DEC 2023

MA – Dec 2023 – L2 – Q1a – Divisional performance

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

Question

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)

Answer

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Tags: Divisional Performance, Residual Income, Return on investment
Level: Level 2

Topic: Divisional Performance
Series: DEC 2023

FM – May 2018 – L2 – Q1c – Divisional Performance

Calculate and analyze return on investment and residual income before and after a new investment in a division.

Question

The Bottle Labelling Division of Crush Drink Ltd currently has capital employed of GH¢100,000 and earns an annual profit after depreciation of GH¢18,000. The divisional manager is considering an investment of GH¢10,000 in an asset which will have a ten-year life with no residual value and will earn a constant annual profit after depreciation of GH¢1,600. The cost of capital is 15%.

Required:
Calculate the following and comment on the results.
i) The return on divisional investment, before and after the new investment
ii) The divisional residual income before and after the new investment

Answer

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Tags: Divisional Profit, Investment Analysis, Residual Income, Return on investment
Level: Level 2

Topic: Divisional Performance
Series: MAY 2018

MA – May 2018 – L2 – Q1b – Divisional performance

Compare residual income and return on investment for divisional performance measurement, highlighting their advantages.

Question

Compare and contrast the use of residual income and return on investment in divisional performance measurement, stating the advantages.

Answer

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Tags: Divisional Performance, Residual Income, Return on investment
Level: Level 2

Topic: Divisional Performance
Series: MAY 2018

MA – Nov 2018 – L2 – Q1b – Divisional Performance

Evaluate the impact of scrapping an inefficient bus on the ROI of a transportation business unit.

Question

Super Express Transport Company runs a fleet of buses on the Accra-Sunyani route, which is considered a business unit.

The following is an extract from the final accounts of the company as at the last operating year:

Stock of buses on that route at cost less depreciation is GH¢660,000.
Net operating profit is GH¢198,000.

One of the buses, bought three years ago at the cost of GH¢150,000, was not performing efficiently because it got involved in an accident just a year after it was purchased. Although the damage was minor, the Operations Manager suggested that the bus be scrapped, in spite of the fact that it earned a profit of GH¢6,000 in the year. Depreciation is at the rate of 20% p.a. on a straight-line basis.

Required:
Evaluate the effect of this proposal on the performance of the business unit, if Return on Investment (ROI) is used to measure the performance of subunits. (5 marks)

Answer

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Tags: Asset Management, Capital Investment, Performance Evaluation, Return on investment
Level: Level 2

Topic: Divisional Performance
Series: NOV 2018

MA – May 2019 – L2 – Q1b – Divisional Performance

Evaluate divisional performance using ROI and RI and assess the impact of investment decisions on these metrics.

Question

Ayittey Ltd is an organization with two divisions: A and B, each with its own cost and revenue streams. Each of the two divisions is classified as an Investment center. The company’s cost of capital is 12%. Historically, investment decisions have been made by calculating the return on investment (ROI). A new manager who has recently been appointed in Division A has argued that using residual income (RI) to make investment decisions would result in ‘better goal congruence’ throughout the company. The data below shows the current position of the division as at the end of 31 December, 2016:

Details of Projects	Project A	Project B
Capital required	GH¢ 82.8 million	GH¢ 40.6 million
Sales generated	GH¢ 44.6 million	GH¢ 21.8 million
Net Profit margin	28%	33%

The company is seeking to maximize shareholders’ wealth. Assuming that Division A acquires a more efficient asset at GH¢15 million and Division B sold one of its assets with a written down value of GH¢24 million, and profits are expected to increase and decrease by GH¢11 million and GH¢5 million for Division A and B respectively.

Required:
i) Calculate both the current Return on Investment (ROI) and Residual Income (RI) for each of the divisions. (5 marks)
ii) Calculate and comment on the effect of the decision to invest in the new asset and disposal of some assets on the current ROI and RI. (7 marks)

Answer

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Tags: Divisional Performance, Goal Congruence, Investment Decision, Residual Income, ROI
Level: Level 2

Topic: Divisional Performance
Series: MAY 2019

MA – May 2021 – L2 – Q1b – Divisional performance, Performance analysis

Evaluate the impact of a new investment on a division’s Return on Investment, Residual Income, and manager’s bonus.

Question

b) Peah is a divisional manager of Monrovia Ltd. He is paid a bonus of 5% on the division’s residual income after charging the bonus. The division is currently considering an additional investment of GH¢200,000 with 10 years useful life but nil residual value. The investment is expected to yield a profit after depreciation of GH¢51,600. This will augment the existing capital employed of GH¢1,050,000 that currently offers GH¢264,400 profit after depreciation annually. The company’s policy is to accept investment projects that provide a return of at least 22%.

Required: i) Calculate the Return on Investment and Residual Incomes of the division before considering the new investment. (2 ½ marks)
ii) Advise the division on whether the new investment should be taken or not. (2 ½ marks)
iii) What will be the percentage change in the bonus of Peah if the new investment is added to the division’s existing operations? (3 marks)

Answer

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Tags: Bonus calculation, Investment Appraisal, Residual Income, Return on investment
Level: Level 2

Topic: Divisional Performance, Performance analysis
Series: MAY 2021

MA – April 2022 – L2 – Q1b – Divisional performance

Discuss the impact of involving managers in financial target setting and the disadvantages of using financial indicators alone for performance assessment.

Question

The manager of the fitness club in Papase is dissatisfied with the quarterly bonus system and does not perceive it to be fair. He argues that the financial targets are based on a regional view of all Gyakie fitness clubs and do not take account of specific local circumstances. For instance, the fitness club in Papase is located in a less affluent area of the region. Managers also complain about using solely financial indicators in setting targets. The manager of the fitness club in Papase would like to see participation from all fitness club managers in the development of quarterly financial and non-financial targets.

Required:

i) Discuss the potential impact on Gyakie for involving the fitness club managers in the preparation of their quarterly financial targets. (3 marks)

ii) Explain THREE (3) disadvantages of using financial performance indicators alone to assess performance. (3 marks)

Answer

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Tags: Financial planning, Limitations, Managerial Involvement, Performance Indicators, Target Setting
Level: Level 2

Topic: Divisional Performance
Series: APR 2023

MA – April 2022 – L2 – Q1a – Divisional performance

Evaluate whether a fitness club manager should receive a bonus based on forecasted financial performance.

Question

a) Gyakie Ltd (Gyakie) operates a chain of fitness clubs in Oti Region. Managers at the fitness clubs receive a quarterly bonus if their fitness club achieves or exceeds all of the following financial targets:

Return on Capital Employed (ROCE): 8% (based on net assets)
Asset turnover: 40%
Operating profit margin: 20%

Summary of the actual performance for Quarter 3 of the current year for one of the fitness clubs in Papase is detailed below:

Description	Amount (GH¢)
Revenue	36,000
Staff costs	12,000
Other fixed costs	22,000
Net assets	110,000
Number of customers	600

The quarterly financial targets are set by the head office finance team, and all fitness clubs are given the same target. Gyakie is currently forecasting the performance of its fitness clubs in Quarter 4. The following information will be used to forecast the performance for each of its fitness clubs in Quarter 4:

The average revenue per customer will increase by 10% on Quarter 3.
Customer numbers will increase by 5% on Quarter 3.
Staff costs and net assets are expected to remain at the same level as Quarter 3.
Other fixed costs are expected to decrease by 5% on Quarter 3.
Staff and other costs are fixed (they are not related to the number of customers).

Required: Justify whether the manager of the fitness club in Papase should receive a bonus in Quarter 4 based on the forecast performance. Your computation should include operating profit margin, ROCE, and asset turnover for Quarter 4.

Answer

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Tags: Asset Turnover, Bonus Evaluation, Forecasting, Operating Profit Margin, ROCE
Level: Level 2

Topic: Divisional Performance
Series: APR 2023

MA – May 2016 – L2 – Q5b – Decision Making Techniques, Relevant Cost and Revenue, Divisional Performance

Decision Making Techniques, Relevant Cost and Revenue, Divisional Performance

Question

Unity Company Ltd is preparing for next season’s operations. The company has provided the following information relating to its three products:

	TO	GE	DA
Selling Price	GH¢18.5	GH¢16.2	GH¢12.6
Material Cost (@ GH¢1.75 per kg)	GH¢8.75	GH¢10.5	GH¢3.5
Labour Cost (@ GH¢2.2 per labour hour)	GH¢7.7	GH¢4.4	GH¢7.7
Annual Demand	2,150 units	3,235 units	1,556 units

The company can only make available a total of 18,560 hours in the short run.

Required:

i) Provide the optimal production plan for Unity Ltd for the ensuing period.
(5 marks)

ii) What is the total incremental benefit of producing DA instead of GE, assuming available resources can only meet the demand for DA?
(3 marks)

iii) Indicate the shadow price of the production plan and state the basic assumption under which this price will apply.
(2 marks)

Answer

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Tags: Decision Making, Incremental Benefit, Limiting Factor, Optimal Production Plan, Shadow Price
Level: Level 2

Topic: Decision making techniques, Divisional Performance, Relevant Cost and Revenue
Series: MAY 2016

MA – May 2016 – L2 – Q3 – Transfer Pricing, Divisional Performance, Relevant Cost and Revenue, Decision Making Techniques

Calculate profitability under different costing methods and evaluate an outsourcing offer, including additional decision factors.

Question

Anim Shoes Ltd produces and sells Ghana-made shoes with two main departments: production/sales and repairs departments. The production and sales department produces and sells 10,000 pairs of shoes each year. Due to the low quality of raw materials available in the country, the company includes an additional GH¢11 in the cost of a pair of shoes sold to cater for one-year after-sales repairs. On average, it is expected that a quarter of the total pairs of shoes sold would come back for repairs a year after sale. Repair works on a pair of shoes take 2 labour hours, and it is estimated that total repair cost on the quarter of shoes will be GH¢27,500.

In addition to providing repair services to the production and sales department, the repair department sometimes picks up offers from outside the company. Such external offers are billed at full cost and a margin on sales of 20%. The following is the breakdown of the average repair cost of a pair of shoes:

Cost Item	Cost (GH¢)
Material	2.50
Labour (1.5 per hour)	3.00
Variable Overheads	1.00
Fixed Overheads	2.30

Required:

i) Calculate the individual profits of the Production/Sales department, Repairs department, and Anim Ventures if repairs are done by the repairs department of Anim Ventures at either full cost plus 20% margin on sales or at marginal cost.
(8 marks)

ii) Pee Shoe Repairs has offered to repair each pair of shoes for Anim Ventures at GH¢10.00, a price which is cheaper than what the repairs department is offering. Should Anim Ventures accept this offer?
(5 marks)

iii) Identify THREE other factors Anim Ventures should consider in finalizing the decision in (ii) above.
(3 marks)

iv) Explain TWO principles of a good transfer pricing method.
(4 marks)

Answer

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Tags: Full Costing, Marginal Costing, Outsourcing, Profitability, Transfer Pricing
Level: Level 2

Topic: Decision making techniques, Divisional Performance, Relevant Cost and Revenue, Transfer Pricing
Series: MAY 2016

Topic: Divisional Performance

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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 – Dec 2023 – L2 – Q1b – Divisional Performance

This question defines the concept of responsibility accounting in management accounting systems.

MA – Dec 2023 – L2 – Q1a – Divisional performance

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

FM – May 2018 – L2 – Q1c – Divisional Performance

Calculate and analyze return on investment and residual income before and after a new investment in a division.

MA – May 2018 – L2 – Q1b – Divisional performance

Compare residual income and return on investment for divisional performance measurement, highlighting their advantages.

MA – Nov 2018 – L2 – Q1b – Divisional Performance

Evaluate the impact of scrapping an inefficient bus on the ROI of a transportation business unit.

MA – May 2019 – L2 – Q1b – Divisional Performance

Evaluate divisional performance using ROI and RI and assess the impact of investment decisions on these metrics.

MA – May 2021 – L2 – Q1b – Divisional performance, Performance analysis

Evaluate the impact of a new investment on a division’s Return on Investment, Residual Income, and manager’s bonus.

MA – April 2022 – L2 – Q1b – Divisional performance

Discuss the impact of involving managers in financial target setting and the disadvantages of using financial indicators alone for performance assessment.

MA – April 2022 – L2 – Q1a – Divisional performance

Evaluate whether a fitness club manager should receive a bonus based on forecasted financial performance.

MA – May 2016 – L2 – Q5b – Decision Making Techniques, Relevant Cost and Revenue, Divisional Performance

Decision Making Techniques, Relevant Cost and Revenue, Divisional Performance

MA – May 2016 – L2 – Q3 – Transfer Pricing, Divisional Performance, Relevant Cost and Revenue, Decision Making Techniques

Calculate profitability under different costing methods and evaluate an outsourcing offer, including additional decision factors.

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Topic: Divisional Performance

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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.

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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.

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: MA – Dec 2023 – L2 – Q1b – Divisional Performance

This question defines the concept of responsibility accounting in management accounting systems.

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MA – Dec 2023 – L2 – Q1a – Divisional performance

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

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FM – May 2018 – L2 – Q1c – Divisional Performance

Calculate and analyze return on investment and residual income before and after a new investment in a division.

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MA – May 2018 – L2 – Q1b – Divisional performance

Compare residual income and return on investment for divisional performance measurement, highlighting their advantages.

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MA – Nov 2018 – L2 – Q1b – Divisional Performance

Evaluate the impact of scrapping an inefficient bus on the ROI of a transportation business unit.

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MA – May 2019 – L2 – Q1b – Divisional Performance

Evaluate divisional performance using ROI and RI and assess the impact of investment decisions on these metrics.

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MA – May 2021 – L2 – Q1b – Divisional performance, Performance analysis

Evaluate the impact of a new investment on a division’s Return on Investment, Residual Income, and manager’s bonus.

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MA – April 2022 – L2 – Q1b – Divisional performance

Discuss the impact of involving managers in financial target setting and the disadvantages of using financial indicators alone for performance assessment.

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MA – April 2022 – L2 – Q1a – Divisional performance

Evaluate whether a fitness club manager should receive a bonus based on forecasted financial performance.

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MA – May 2016 – L2 – Q5b – Decision Making Techniques, Relevant Cost and Revenue, Divisional Performance

Decision Making Techniques, Relevant Cost and Revenue, Divisional Performance

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MA – May 2016 – L2 – Q3 – Transfer Pricing, Divisional Performance, Relevant Cost and Revenue, Decision Making Techniques

Calculate profitability under different costing methods and evaluate an outsourcing offer, including additional decision factors.

You're reporting an error for "MA – May 2016 – L2 – Q3 – Transfer Pricing, Divisional Performance, Relevant Cost and Revenue, Decision Making Techniques"

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