Background

Harvest Limited, (HARVEST), is an Irish based global food company specialising in manufacturing ingredients to be used in a wide variety of products. HARVEST was founded over thirty years ago by Joanne Butler, who is still a member of the Board of Directors. HARVEST currently employs over 5,000 staff in 15 different countries and has a reputation in the food industry for developing innovative ingredients at affordable prices. HARVEST issued shares to a number of external investors over the last decade to finance growth. Joanne Butler currently owns 51% of the equity, with the remainder owned by the external investors.

Divisional Performance Measurement

The organisational structure of HARVEST has evolved over time, in tandem with the firms rapid growth and strategic priorities. HARVEST currently has three operating divisions (i.e. investment centres); DAIRY, SAVOURY and BEVERAGE. Each division is evaluated against an equally weighted combination of the following financial measures; Return on Capital Employed (ROCE), Residual Income (RI) and Economic Value Added (EVA). All three divisions are expected to achieve a minimum 9% return per annum. HARVEST has a policy that all value-creating expenditures incurred by each division will generate a return over a four year period only.

At a recent meeting of the Board of Directors of HARVEST, there was considerable debate amongst those present about the merits of retaining all three divisions due to the significant capital expenditure likely to be required to remain competitive in the rapidly consolidating food industry. After much deliberation, it was agreed that the worst performing division in relation to the three financial measures noted should be disposed of when market conditions allowed, and that the sale proceeds would be utilised to boost the performance of the remaining two divisions.

To expedite this decision, the Board of Directors agreed that HARVESTs Managing Director, Claire Quain, would calculate the 2014 financial performance of each division (see Appendix I for the relevant data) and on that basis would make an initial recommendation to the Board, at their next scheduled meeting, regarding the disposal/retention of each of HARVESTs three divisions.

APPENDIX I

RELEVANT 2014 DATA FOR EACH OF HARVESTS THREE DIVISIONS

	DAIRY / 000	SAVOURY / 000	BEVERAGE / 000
Sales Revenue	3,950	4,260	4,975
Expenses
Direct labour costs	340	415	480
Indirect labour costs	45	90	110
Direct material costs	665	705	810
Indirect material costs	95	125	145
Production overheads	115	150	175
Advertising costs	500	400	300
Insurance costs	55	60	65
IT development costs	250	150	100
Depreciation costs	40	60	75
Staff training costs	210	90	75
Rent costs	40	50	65
Research & development costs	750	600	400
Utility costs	25	35	45
Interest payable	150	180	205
Taxation payable	110	125	150
Total expenses	3,390	3,235	3,200
Capital Employed	9,500	14,000	18,750

*Assume a tax rate of 25% on profits.

The net impact of the carry forward EVA is NIL on the current years opening capital employed in all three operating divisions.

a) Calculate the Return on Capital Employed, Residual Income and Economic Value Added for each of HARVESTs three operating divisions for 2014. Using your calculations, recommend (with reasons) which division should be disposed of? State clearly any assumptions that you make.