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Academic literature contends that controllable contribution is the most appropriate measure of a divisional manager's performance since it measures the ability of managers to use
Academic literature contends that controllable contribution is the most appropriate measure of a divisional manager's performance since it measures the ability of managers to use the resources under their control effectively. On the other hand, Return on Investment (ROI) expresses divisional profit as a percentage of the assets employed in the division instead of taking absolute profit figures. (a) Suppose division A earns a profit of Klmillion and division B earns a profit of K2 million. Would it be appropriate to conclude that division B is more profitable than division A? (2 Marks) (b) Now assume that K4million is invested in division A and K20millionis invested in division B. Does this information change your answer given in (a)? Justify with the support of relevant calculations. (4 Marks) (c) The head office for Quantum Limited has proposed an investment of Kl million for each of division X and division Y. The investment figures relating to two divisions are given below. 1Wes=1,0001000 Explain, with the support of appropriate calculations, how each divisional manager would react to the proposed investment based on its impact on divisional performance. (7Marks) (d) Division Z has the following financial nerformance figures: Would the division wish to accept a new possible investment costing K 10,000 that would earn a profit of K2,000 per annum if performance evaluation was based on: (i) Return on Investment (ii) Residual Income? (6 Marks) (6Marks)
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