A2- Al Makahuwa Group Al Makahuwa Group which specialises in Roasting Organic Arabica Coffee and selling it across several Coffee Shops which operate across Oman. Al Makahuwa plc is organised into two divisions (Coffee Roasting and Coffee Shops) which are operated as investment centres. The Coffee Shops division operates in the high-end market and is known for its high quality, targeting coffee connoisseurs and extremely demanding customers. Al Makahuwa Group currently focuses on financial performance and uses Return on Investment (ROI) to calculate management bonuses which are payable annually with ROI defined as operating profit as a percentage of average operating assets employed. All investments are expected to earn a minimum ROI of 11.5% which is based on the cost of capital of the Group. The ROI of the Coffee division has ranged from 12% to 13% for several years. Coffee Shops Division's income statement for the year ending 30 June 2019 is as follows: Revenue COGS Gross Profit Operating Costs: 11,550,000 7.975.000 3,575,000 Administrative 880,000 Marketing 1,210,000 Total Operating 2,090,000 Costs 1.485,000 Operating Profit The Coffee Shop division's operating assets employed were 12,926,500 as at 30 June 2019 and 11,128,843 as at 30 June 2018. 1. Calculate the Return on Investment (ROI) in average operating assets employed for the year ended 30 June 2019 for the Coffee Shop Division. (2 marks) 2. Calculate the Residual Income (RI) on the basis of average operating assets employed for the year ended 30 June 2019. The cost of capital is 11.5%. (2 marks) 3. Draft a memo that includes the following: 1. 11. Comment on your findings in Requirement 1. Outline of the advantages and disadvantages of using ROI and RI to assess perfor- mance. (8 marks) Word count 300 words 4. For the financial year ending 30 June 2019, the Coffee Shop Division is planning to launch an Ice Coffee brand project which preliminary calculations have predicted will have an ROI of 12%. Make a recommendation as to whether the proposed new Ice Coffee project should be accepted or rejected using ROI. (2 marks) Word Count 100 words Al Makahuwa Group, encourages trade between the two divisions: In the first stage, the Roasting Division roasts 20,000 kgs of coffee per month which are then transferred to the Coffee Shops Division for packing and sale to customers in the shop. The variable costs for this level of production total 250,000 and fixed costs are 150,000 per month. The coffee roasting division currently does not sell roasted coffee to the external market. In the second stage, the Coffee Shops Division 'buys in the 20,000 kgs from the roasting Division at and an agreed transfer price. It then incurs additional variable costs of 145,000 and fixed costs of 260,000 to complete and package the product ready for sale. The Coffee Shops Division then sells all 20,000 kgs of the final product to the external market for 45 per Kg. The divisional managers are responsible for their division operating profit and receive a monthly bonus based on this profit. In addition, the Senior Management team are keen to keep the internal transfer system and create incentives to motivate managers to do business with each other. Required: 5. Calculate the monthly operating profit of both Roasting and Coffee Shops Divisions and in total using the following 2 approaches: (a) Transfers from Roasting Division to Coffee Shops Division at 180% of variable cost. (3 marks) (b) Transfers from Roasting Division to Coffee Shops Division at the current market price for roasted unpacked organic Arabica coffee of 21 per kg. (3 marks) (c) Discuss the advantages and disadvantages of the two transfer pricing policies you have ap- plied above and consider their implications on goal congruence, managerial incentives, moti- vation and profit. Word Count 350 words (9 marks) 6. Al Makahwa Group is currently using an incremental budgeting approach with budgets being imposed by Senior Managers to Middle Management and other employees in the business. A newly appointed finance director has just joined the business and is questioning the suitability of the Al Makahuwa Group approach to budgeting. (a) Discuss whether the current incremental imposing budgeting approach is appropriate. (b) Explain what a participative approach to budgeting is and what would be the potential ad- vantages and disadvantages of introducing this approach at the Al Makahuwa Group. (6 marks) Word count 250 words END OF SECTION A TOTAL 35 MARKS