Advanced A company supplying capital equipment to the engineering industry is part of a large group of diverse companies. It determines its tender prices by adding a standard profit margin as a percentage of its prime cost.

Although it is working at full capacity the group managing director considers the company’s annual return on capital employed as inadequate.

You are required, as the group assistant manage¬ ment accountant, to provide him with the following information:

(a) why the retum-on-prime-cost (ROPC) ap¬ proach to tendering would be likely to yield an inadequate return on capital employed;

(7 marks)

(b) the steps involved in calculating a retum-on capital employed (ROCE) tendering rate for a particular contract; (7 marks)

(c) three problems likely to be encountered in meeting a pre-set profit target on a ROCE basis. (6 marks)

(Total 20 marks)

CIMA P3 Management Accounting LO1