25 Marks (45 minutes) QUESTION 2: Adapted ACCA The Biscuits division (Division B) and the Cakes division (Division C) are two division of a large, manufacturing company. Whilst both divisions operate in almost identical markets, each division operates separately as an investment centre. Each month, operating statements must be prepared by each division and these are used as a basis for performance measurement for the divisions. Last month, senior management decided to recharge head office costs to the divisions. Consequently, each division is now going to be required to deduct a share of head office costs in its operating statement before arriving at "net profit", which is then used to calculate return on investment (ROI). Prior to this, Rol has been calculated using controllable profit only. The company's target ROI, however, remains unchanged at 20% per annum. For each of the last three months, Division B and C have maintained Rols of 22% per annum and 23% per annum respectively, resulting in healthy bonuses being awarded to staff. The company has a cost of capital of 10%. The budgeted operating statement for the month of November is shown below: B C N$ N$ Sales revenue 1 300 000 1 500 000 Less: variable costs (700 000) (800 000) Contributions 600 000 700 000 Less: controllable fixed costs (134 000) (228 000) Controllable profit 466 000 472 000 Less: apportionment of head office costs (155 000 (180 000) Net profit 311 000 292 000 N$23 200 000 N$22 600 000 Divisional net assets Marks 7 7 REQUIRED 2.1. Calculate the expected annualised Return on Investment (ROI) using the new method as preferred by senior management, based on the above budgeted operating statements, for each of the divisions. 2.2. The divisional managing directors are unhappy about the results produced by your calculations in (2.1) above and have heard that a performance measure called "Residual Income" (RI) may provide more information. Calculate the annualised Residual Income (RI) for each of the divisions, based on the net profit figures for the month of November. 2.3. Discuss the expected performance of each of the two divisions, using both ROI and RI, and making any additional calculations deemed necessary. Conclude as to whether, in your opinion, the two divisions have performed 8 3 well. 25 2.4. Explain any behavioural problems that will result if the company's senior management insist on using solely ROI, based on net profit rather than controllable profit, to assess divisional performance and reward staff. TOTAL MARKS Page 3 of 6