1. Based on the current performance measure(i.e. ROI) determine the performance of the two divisions of KB for the current year.

2. Highlight other factors that you consider important in interpreting the results of the two divisions (based on ROI) and discuss any relevant advice you would give to KB.

3. Using the proposed performance measure (i.e. RI) determine the performance of the two divisions of KB.

4. what conclusions can you come up with following your calculations in (4) above?

5. Discuss any two draw backs that KB should be aware of as they plan to implement the residual income (RI) as a performance measure.

KB is a company that manufactures and sells beverages. The company is divisionalized such that the Windhoek division manufactures soft drinks while the Okahandja Division manufactures bottled Water. Managers heading each of the two divisions have been empowered to make capital investment decisions of their divisions without head office interference.

KB measures performance of the two divisions based on Return on investment (ROI). when the division performs higher than the set ROI of 18%, the divisional managers will be given a performance bonus. in 2019, the Okahandja division rejected an investment that had a ROI of 18% for the reason that it would have diluted their overall ROI to 17.5%. this meant that the division would not have qualified for a performance bonus. when the head office of KB learnt of this bad practise, they were unhappy and have now decided to change how they measure performance by introducing the Residual Income (RI) approach. Both performance measures are based on the division's controllable profit and the average assets of the division.

the following operating statements has been prepared by an inexperienced accountant:

Windhoek. Okahandja

Sales 3800 8400

less: VC. (1400) (3030)

Contribution. 2400 5370

Less:FC. (945) (1420)

Operating profit. 1455 3950

Beginning Controllable net assets:

Windhoek = 13 000

Okahandja = 24 000

Ending Controllable net assets

Windhoek = 9 000

Okahandja = 30 000

Notes:

1. Depreciation charge for the two divisions was 165 000 for Windhoek and 460 000 for Okahandja. The depreciation charge has already been included in the fixed costs contained above in the operating statement. On further investigation, you have ascertained that 30% of the depreciation charge in both divisions related to those assets that are controlled by the head office but are owned by the individual divisions.

2. Included in the net assets figures above is a plant acquired at the beginning of the year by the Okahandja division for a cost of 2 million. The Okahandja division applied the reducing balance method of depreciation while the Windhoek division applies the straight-line method. It is company policy to charge the full year's depreciation in the year of acquisition. The Windhoek division did not add any significant amount to its non-current assets for the current period.

3. The Head office costs allocated to each division in the period were 620 000 for Windhoek and 700 000 for Okahandja. These costs are included in the fixed costs shown in the operating statement above.

4. The weighted average cost of capital (WACC) applicable to KB is 12%.

Required:

1. Based on the current performance measure(ROI) determine the performance of the two divisions of KB for the current year.

2. Highlight other factors that you consider important in interpreting the results of the two divisions based on ROI and discuss any relevant advice you would give KB

3. Using the proposed performance measure (RI) determine the performance of the two divisions.

4. What conclusions can you come up based on the calculation in (3) above?

5. Discuss teo draw backs that KB should consider as they plan to implement the residual income as a performance measure.

Khomas Beverages Lid KB) is a company that manufactures and sells beges. The company is divisionalised such that the Windhoek division manufactured while the Okahanda Division manufactures bottled water Managers heading each of the the visions have been empowered to make capital investment decisions of their dins without head office Interference Kemasures the performance of the two divisions based on return on investment Row When the division performs higher than the set ROI of 18%, the divisional managers we begiven a performance bonus in 2019, the Okahandja division rejected an investment that had a ROI of 185. for the reason that it would have diluted the overall ROI to 175 This meant at the division would not have used for a performance bonut When the Head of fount of this bad praction they were unhappy and have now decided to change how they measure performance by introducing the residual income (RI) approach. Both performance measures are based on the division's controllable profit and the average assets of the division The following summarised operating statement has been prepared by priced accountant and you have been hired to assister Windhoek Okahandja N5000 NS000 Sales revenue 3800 8400 Les Vandle costs 114000 3000 Contribution 2400 5 370 Less Fund costs 945 Operating profit 3950 Beginning controllable not assets per division 13 000 24 000 Ending controllable net assets per division 9000 30 000 Notes: 1 Depreciation charge for the two divisions was N$165 000 for Windhook and N5460 000 for Okahandia. The depreciation charge has already been included in the feed costs contained in above operating statement. On further investigation you have ascurtained that 30% of the depreciation charge in both divisions relates to those assets that are controlled by the Head Office but are owned by the individuals 2 Included in the net assets figures above is a plantacquired at the beginning of the year by the Okahanda division for a cost of NS2 million. The Olahanda vision applies the reducing balance method of depreciation while the Windhoek applies the straight-line method. It is company policy to charge the full year's depreciation in the year of acquisition The Windhoek division did not add any significant amount to shoncurrent assets for the current period 3. The Head Office costs allocated to each division in the period were N$620 000 for Windhoek and N$700 000 for Okahanda. These cost are included in the fed costs shown in operating statement above 4. The weighted average cost of capital (WACC) applicable to KB is 12% Requirement Mark 2.1 Based on the current performance measurel. Rol determine the performance of 8 the two divisions of KB for the current year 22 Basing your answer on calculations in (2.1) above, identify the division that 2 performed better than the other 23 Highlight other factors that you consider important in interpreting the results of the 4 two divisions based on ROI) and discuss any relevant advice you would give 10 KB. 2.4 Using the proposed performance measure (RI) determine the performance of the two divisions of KB 2.5 What conclusions can you come up with following your calculations in 24) above? 2 26 Discuss any two advantages that might accrue to KB of using the residual income 2 as a performance measure 2.7 Discuss any two draw backs that KB should be aware of as they plan to implement 2 the residual income as a performance measure N.8. Where necessary show all relevant workings Total 24 Khomas Beverages Ltd ("K8") is a company that manufactures and sells beverages. The company is divisionalised such that the Windhoek division manufactures soft drinks while the Okahandja Division manufactures bottled water. Managers heading each of the two divisions have been empowered to make capital Investment decisions of their divisions without head office interference KB measures the performance of the two divisions based on return on investment (ROI). When the division performs higher than the set ROI of 18%, the divisional managers will be given a performance bonus. In 2019, the Okahandja division rejected an investment that had a Rol of 18% for the reason that it would have diluted their overall ROI to 17.5%. This meant that the division would not have qualified for a performance bonus. When the Head Office of KB learnt of this bad practice, they were unhappy and have now decided to change how they measure performance by introducing the residual income (RI) approach. Both performance measures are based on the division's controllable profit and the average assets of the division The following summarised operating statement has been prepared by an inexperienced accountant and you have been hired to assist her: Windhoek Okahandja N$000 N$000 Sales revenue 3 800 8 400 Less Variable costs (1400) (3 030) Contribution 2 400 5 370 Less Fixed costs (945) (1 420) Operating profit 1455 3950 Beginning controllable net assets per division 13 000 24 000 Ending controllable net assets per division 9000 30 000 Notes: 1. Depreciation charge for the two divisions was N$165 000 for Windhoek and N$460 000 for Okahandja. The depreciation charge has already been included in the fixed costs contained in above operating statement. On further investigation, you have ascertained that 30% of the depreciation charge in both divisions relates to those assets that are controlled by the Head Office but are owned by the individual divisions. 2. Included in the net assets figures above is a plant acquired at the beginning of the year by the Okahandja division for a cost of N$2 million. The Okahandja division applies the reducing balance method of depreciation while the Windhoek applies the straight-line method. It is company policy to charge the full year's depreciation in the year of acquisition. The Windhoek division did not add any significant amount to its noncurrent assets for the current period 3. The Head Office costs allocated to each division in the period were N$620 000 for Windhoek and N$700 000 for Okahandja. These cost are included in the fixed costs shown In operating statement above. 4. The weighted average cost of capital (WACC) applicable to KB is 12%. Khomas Beverages Lid KB) is a company that manufactures and sells beges. The company is divisionalised such that the Windhoek division manufactured while the Okahanda Division manufactures bottled water Managers heading each of the the visions have been empowered to make capital investment decisions of their dins without head office Interference Kemasures the performance of the two divisions based on return on investment Row When the division performs higher than the set ROI of 18%, the divisional managers we begiven a performance bonus in 2019, the Okahandja division rejected an investment that had a ROI of 185. for the reason that it would have diluted the overall ROI to 175 This meant at the division would not have used for a performance bonut When the Head of fount of this bad praction they were unhappy and have now decided to change how they measure performance by introducing the residual income (RI) approach. Both performance measures are based on the division's controllable profit and the average assets of the division The following summarised operating statement has been prepared by priced accountant and you have been hired to assister Windhoek Okahandja N5000 NS000 Sales revenue 3800 8400 Les Vandle costs 114000 3000 Contribution 2400 5 370 Less Fund costs 945 Operating profit 3950 Beginning controllable not assets per division 13 000 24 000 Ending controllable net assets per division 9000 30 000 Notes: 1 Depreciation charge for the two divisions was N$165 000 for Windhook and N5460 000 for Okahandia. The depreciation charge has already been included in the feed costs contained in above operating statement. On further investigation you have ascurtained that 30% of the depreciation charge in both divisions relates to those assets that are controlled by the Head Office but are owned by the individuals 2 Included in the net assets figures above is a plantacquired at the beginning of the year by the Okahanda division for a cost of NS2 million. The Olahanda vision applies the reducing balance method of depreciation while the Windhoek applies the straight-line method. It is company policy to charge the full year's depreciation in the year of acquisition The Windhoek division did not add any significant amount to shoncurrent assets for the current period 3. The Head Office costs allocated to each division in the period were N$620 000 for Windhoek and N$700 000 for Okahanda. These cost are included in the fed costs shown in operating statement above 4. The weighted average cost of capital (WACC) applicable to KB is 12% Requirement Mark 2.1 Based on the current performance measurel. Rol determine the performance of 8 the two divisions of KB for the current year 22 Basing your answer on calculations in (2.1) above, identify the division that 2 performed better than the other 23 Highlight other factors that you consider important in interpreting the results of the 4 two divisions based on ROI) and discuss any relevant advice you would give 10 KB. 2.4 Using the proposed performance measure (RI) determine the performance of the two divisions of KB 2.5 What conclusions can you come up with following your calculations in 24) above? 2 26 Discuss any two advantages that might accrue to KB of using the residual income 2 as a performance measure 2.7 Discuss any two draw backs that KB should be aware of as they plan to implement 2 the residual income as a performance measure N.8. Where necessary show all relevant workings Total 24 Khomas Beverages Ltd ("K8") is a company that manufactures and sells beverages. The company is divisionalised such that the Windhoek division manufactures soft drinks while the Okahandja Division manufactures bottled water. Managers heading each of the two divisions have been empowered to make capital Investment decisions of their divisions without head office interference KB measures the performance of the two divisions based on return on investment (ROI). When the division performs higher than the set ROI of 18%, the divisional managers will be given a performance bonus. In 2019, the Okahandja division rejected an investment that had a Rol of 18% for the reason that it would have diluted their overall ROI to 17.5%. This meant that the division would not have qualified for a performance bonus. When the Head Office of KB learnt of this bad practice, they were unhappy and have now decided to change how they measure performance by introducing the residual income (RI) approach. Both performance measures are based on the division's controllable profit and the average assets of the division The following summarised operating statement has been prepared by an inexperienced accountant and you have been hired to assist her: Windhoek Okahandja N$000 N$000 Sales revenue 3 800 8 400 Less Variable costs (1400) (3 030) Contribution 2 400 5 370 Less Fixed costs (945) (1 420) Operating profit 1455 3950 Beginning controllable net assets per division 13 000 24 000 Ending controllable net assets per division 9000 30 000 Notes: 1. Depreciation charge for the two divisions was N$165 000 for Windhoek and N$460 000 for Okahandja. The depreciation charge has already been included in the fixed costs contained in above operating statement. On further investigation, you have ascertained that 30% of the depreciation charge in both divisions relates to those assets that are controlled by the Head Office but are owned by the individual divisions. 2. Included in the net assets figures above is a plant acquired at the beginning of the year by the Okahandja division for a cost of N$2 million. The Okahandja division applies the reducing balance method of depreciation while the Windhoek applies the straight-line method. It is company policy to charge the full year's depreciation in the year of acquisition. The Windhoek division did not add any significant amount to its noncurrent assets for the current period 3. The Head Office costs allocated to each division in the period were N$620 000 for Windhoek and N$700 000 for Okahandja. These cost are included in the fixed costs shown In operating statement above. 4. The weighted average cost of capital (WACC) applicable to KB is 12%