Glasnost plc is a large business organised on divisional lines. Two typical divisions are East and West. They are engaged in broadly similar activities and, therefore, central management compares their results to help it to make judgements on managerial performance.

Both divisions are regarded as investment centres.

A summary of last year’s financial results of the two divisions is as follows:

West East

£000 £000 £000 £000 Capital employed 2,500 500 Sales revenue 1,000 400 Manufacturing cost:

Direct (300) (212)

Indirect (220) (48)

Selling and distribution costs (180) (700) (40) (300)

Divisional profit 300 100 Apportionment of uncontrollable common overhead costs (50) (20)

Profit for the period 250 80 At the beginning of last year, West division incurred substantial expenditure on automated production lines and new equipment. East has quite old plant. Approximately 50 per cent of the sales revenue of East comes from internal transfers to other divisions within the business. These transfers are based on an unadjusted prevailing market price.

The inter-divisional transfers of West are minimal.

Management of the business focuses on return on investment as a major performance indicator. The required minimum rate of return is the business’s cost of capital of 10 per cent a year.
Required:

(a) Compute any ratios (or other measures) that you consider will help in an assessment of the costs and performance of the two divisions.

(b) Comment on this performance, making reference to any matters that give cause for concern when comparing the divisions or in divisional performance generally.
Advanced-level exercises.

AppendixLO1