Advanced: Merits and problems associated with three proposed divisional performance measures Sliced Bread pic is a divisionalized
Question:
Advanced: Merits and problems associated with three proposed divisional performance measures Sliced Bread pic is a divisionalized company. Among its divisions are Grain and Bakery. Grain’s operations include granaries, milling and dealings in the grain markets; Bakery operates a number of bakeries.
The following data relate to the year ended 30 November:
Divisional managements (DMs) are given authority to spend up to £20 000 on capital items as long as total spending remains within an amount provided for small projects in the annual budget. Larger projects, as well as sales of assets with book values in excess of £20 000, must be submitted to central management (CM). All day-to-day opera¬ tions are delegated to DMs, whose performance is monitored with the aid of budgets and reports.
The basis for appraising DM performance is currently under review. At present divisions are treated as investment centres for DM performance appraisal, but there is disagreement as to whether return on capital employed or residual income is the better measure. An alternative suggestion has been made that DM performance should be appraised on the basis of controllable profit; this measure would exclude depreciation and gains or losses on sale of assets, treating investment in fixed assets as a CM responsibility.
The cost of capital of Sliced Bread pic is 15% per annum.
Requirements
(a) Calculate for both divisions the three measures (return on capital employed, residual income and controllable profit) which are being considered by Sliced Bread pic, and state any assumptions or reservations about the data you have used in your calculations.
(5 marks)
(b) Examine the merits and problems of Sliced Bread pic’s three contemplated approaches to DM performance appraisal, and briefly suggest how CM could determine the required level of performance in each case.
(15 marks)
(c) Discuss briefly whether further measures are needed for the effective appraisal of DM performance. (5 marks)
(Total 25 marks)
Step by Step Answer:
