ABC Ltd is a large company that manufactures and sells wooden garden furniture. It has been very active in acquisition in recent years and acquired 2 small companies in the last few years. Mr. Lee, the CEO, determines to let the 2 companies running as autonomous divisions, arguing that they know their business. The division heads bonuses are linked to their performance.

Selected sales and operating data of last year for the 2 divisions are given below:

	A	B
Sales	$12,000,000	$14,350,000
Cost of goods sold	9,000,000	10,640,000
Selling and administrative expense	2,400,000	2,800,000
Average operating assets	3,000,000	7,000,000
Minimum required rate of return	14%	12%

Note that the minimum required rate of return are different for each division as they are in different line of business facing different types of customers.

Required:

a. Discuss the validity of Mr. Lees argument and discuss two more advantages of decentralizing operations. (5 marks)

b. Determine the net operating income for each division. (2 marks)

c. Compute the Margin, Turnover and Return on Investment (ROI) for each division. (6 marks)

d. Compute the Residual Income (RI) for each division. (4 marks)

e. Assume that each division is presented with an investment opportunity that requires investment of $1,000,000 in average operating assets and yield operating income of $150,000.

(1) If performance is being measured by ROI, which division(s) will probably accept the opportunity? Show your supporting calculations for each division if they accept the investment opportunity. (4 marks)

(2) If performance is being measured by RI, which division(s) will probably accept the opportunity? Show your supporting calculations for each division if they accept the investment opportunity. (4 marks)

f. Mr. Au, the Head of Division B has suggested that other measures are equally important as financial measures and has suggested using Balanced Scorecard. Discuss how the Balanced Scorecard differs from traditional financial performance measures. (5 marks)