a The Zoopa Group is comprised of two divisions. The Core Division manufactures engines and the Solo Division assembles premium motorcycles. The performances of the Divisional Managers and consequently their bonuses, is based on the return on capital employed (ROCE) of their individual divisions. Both of these divisions operate in highly competitive markets. A key component in a motorcycle is the engine. Engines are readily available in the open market and the Solo Division currently buys 5,400 engines internally from the Core Division for 1,375 per engine. The manager of the Solo Division has just received the following message from the Core Division, that due to recent cost increases the price per engine will now be 1,600. After receiving the message, the manager of the Solo Division contacted several external manufacturers and found one would supply the required engines at 1,375 per engine. However, she has since received a directive from the Managing Director of the group that states she must buy the engines internally. Following the recent cost increases, the full absorption cost of the motorcycle engine is 1,450. This includes 400 for fixed production overheads. This type of motorcycle engine is one of many different engines produced by the Core Division. The manager of the Core Division is aware of the competitive external market that he faces and knows that it will be difficult to charge external customers more that 1,375 per engine. However, he is aware that rising costs may have an impact on his bonus. He is trying to make as much profit as he can from internal sales because the division is currently working below capacity. Required: a) Calculate the incremental impact on the annual profits of each of the two divisions and the Zoopa Group as a whole, using the directive that the engines must be (3 marks) purchased internally for 1,600 per engine instead of from the external supplier. b) Calculate the impact on the annual profits of each of the two divisions and the Zoopa Group as a whole if Solo is allowed to choose its own suppliers. (3 marks) c) Write a report to the Managing Director of the group that explains the disadvantages and behavioural implications of using ROCE as a divisional performance measure. Your answer must be based upon the above scenario and include an explanation (8 marks) of responsibility accounting. 5 continued d) The Core Division has developed a new "lean burn" engine that is sold exclusively to external customers. The production of this engine will utilise the spare capacity of the division and will earn the division a contribution of 40 per machine hour. The demand is so high for the engines that their production could also use 9,000 machine hours that are currently used to make 1,000 of the engines that are transferred to the Solo Division. Calculate the minimum and maximum transfer (7 marks) prices that could now be charged for the motorcycle engines that are internal transfers to the Core Division. e) The Zoopa Group is considering investing in three machines but only has sufficient funds in the budget to pay for two. Profit forecasts and cost of investment for each machine are provided below: Machine 3 Machine 1 '000 Machine 2 '000 '000 Profit forecasts 65 80 110 Cost of investment 300 425 650 Capital charges for the group are calculated at 6%. Required: Calculate the Return on Investment and the Residual Income for each machine and comment on the outcome. (4 marks) (total 25 marks) a The Zoopa Group is comprised of two divisions. The Core Division manufactures engines and the Solo Division assembles premium motorcycles. The performances of the Divisional Managers and consequently their bonuses, is based on the return on capital employed (ROCE) of their individual divisions. Both of these divisions operate in highly competitive markets. A key component in a motorcycle is the engine. Engines are readily available in the open market and the Solo Division currently buys 5,400 engines internally from the Core Division for 1,375 per engine. The manager of the Solo Division has just received the following message from the Core Division, that due to recent cost increases the price per engine will now be 1,600. After receiving the message, the manager of the Solo Division contacted several external manufacturers and found one would supply the required engines at 1,375 per engine. However, she has since received a directive from the Managing Director of the group that states she must buy the engines internally. Following the recent cost increases, the full absorption cost of the motorcycle engine is 1,450. This includes 400 for fixed production overheads. This type of motorcycle engine is one of many different engines produced by the Core Division. The manager of the Core Division is aware of the competitive external market that he faces and knows that it will be difficult to charge external customers more that 1,375 per engine. However, he is aware that rising costs may have an impact on his bonus. He is trying to make as much profit as he can from internal sales because the division is currently working below capacity. Required: a) Calculate the incremental impact on the annual profits of each of the two divisions and the Zoopa Group as a whole, using the directive that the engines must be (3 marks) purchased internally for 1,600 per engine instead of from the external supplier. b) Calculate the impact on the annual profits of each of the two divisions and the Zoopa Group as a whole if Solo is allowed to choose its own suppliers. (3 marks) c) Write a report to the Managing Director of the group that explains the disadvantages and behavioural implications of using ROCE as a divisional performance measure. Your answer must be based upon the above scenario and include an explanation (8 marks) of responsibility accounting. 5 continued d) The Core Division has developed a new "lean burn" engine that is sold exclusively to external customers. The production of this engine will utilise the spare capacity of the division and will earn the division a contribution of 40 per machine hour. The demand is so high for the engines that their production could also use 9,000 machine hours that are currently used to make 1,000 of the engines that are transferred to the Solo Division. Calculate the minimum and maximum transfer (7 marks) prices that could now be charged for the motorcycle engines that are internal transfers to the Core Division. e) The Zoopa Group is considering investing in three machines but only has sufficient funds in the budget to pay for two. Profit forecasts and cost of investment for each machine are provided below: Machine 3 Machine 1 '000 Machine 2 '000 '000 Profit forecasts 65 80 110 Cost of investment 300 425 650 Capital charges for the group are calculated at 6%. Required: Calculate the Return on Investment and the Residual Income for each machine and comment on the outcome. (4 marks) (total 25 marks)