Company SustFurniture is a UK-based organisation with a divisionalised structure which specialises in designing and manufacturing sustainably sourced furniture. Although the company acknowledges that its main responsibility is to maximise shareholder wealth, its vision is to supply quality furniture which is ethically sourced, designed and manufactured' and this is inextricably linked with higher production costs. Despite the higher costs, everything that SustFurniture supplies is made from eco, sustainably sourced and manufactured timber. SustFurniture also ensures that throughout the supply chain, from sourcing of timber right through to delivery in the UK, every aspect of the business is conducted in the most ethical of ways. SustFurniture is split into two investment centres, D and E, each managed by a different divisional manager. The performance of each divisional manager is still assessed using a single performance measure, namely Return on Investment (ROI) which is calculated as net profit divided by total assets less current liabilities at the end of the year. The cost of capital for both divisions is 10%. The newly appointed CFO of SustFurniture suggested that managers of both divisions should invest in a new machinery which requires an investment of 1,200,000 and would generate a controllable profit of 150,000. However, the CFO did not consider the environmental impact of the new machinery. The managers of the divisions believe that the machinery is not environmentally friendly as it has considerably high CO2 emissions. Forecast information for the year ending 31st December 2020 for two divisions is shown below. D 53,000,000 E 15,000,000 17,500,000 3,900,000 Sales Operating controllable) profit Non-current assets (Net Book Value) 82,500,000 34,500,000 Current assets less current liabilities 28,500,000 22,600,000 a) Discuss whether the managers of divisions D and E are likely to invest in the new machinery. You should support your discussion with suitable calculations. (Maximum 200 words, excluding calculative work). (8 marks) Although historically investment decisions have been made on the basis of calculating ROI for an investment opportunity, a newly appointed CFO argues that using residual income (RI) to make investment decisions would enable to overcome limitations of ROI associated with the shareholder wealth maximization (which is the main responsibility of SustFurniture). Required b) Calculate Rl of the new investment opportunity and explain why managers of divisions D and E are likely to accept or reject the proposed investments based on RI. Explain the new manager's argument with reference to the calculations in this question. (Maximum 100 words, excluding calculative work). (4 marks) Despite its sustainability focus, SustFurniture still uses financial performance measures to evaluate the performance of the organisation. However, the CEO has recently heard of an innovative SMA technique, namely the Balanced Scorecard (BSC), and considers implementing it in SustFurniture. Required: c) With the reference to relevant literature (e.g. Ridgway, 1956) critically evaluate the use of a single (financial) performance measure by the SustFurniture company. (Maximum 200 words). (7 marks) d) Critically evaluate how the implementation of BSC could be used to improve the performance management and measurement in the company SustFurniture. (Maximum 200 words). (6 marks) e) For each of the perspectives of the Balanced Scorecard propose TWO measures that are appropriate for the company SustFurniture. Additionally, recommend how SustFurniture could modify the standard BSC to better reflect its vision. (Maximum 100 words for the recommendation, i.e. excluding your proposed measures). (8 marks) (Total marks 33) Company SustFurniture is a UK-based organisation with a divisionalised structure which specialises in designing and manufacturing sustainably sourced furniture. Although the company acknowledges that its main responsibility is to maximise shareholder wealth, its vision is to supply quality furniture which is ethically sourced, designed and manufactured' and this is inextricably linked with higher production costs. Despite the higher costs, everything that SustFurniture supplies is made from eco, sustainably sourced and manufactured timber. SustFurniture also ensures that throughout the supply chain, from sourcing of timber right through to delivery in the UK, every aspect of the business is conducted in the most ethical of ways. SustFurniture is split into two investment centres, D and E, each managed by a different divisional manager. The performance of each divisional manager is still assessed using a single performance measure, namely Return on Investment (ROI) which is calculated as net profit divided by total assets less current liabilities at the end of the year. The cost of capital for both divisions is 10%. The newly appointed CFO of SustFurniture suggested that managers of both divisions should invest in a new machinery which requires an investment of 1,200,000 and would generate a controllable profit of 150,000. However, the CFO did not consider the environmental impact of the new machinery. The managers of the divisions believe that the machinery is not environmentally friendly as it has considerably high CO2 emissions. Forecast information for the year ending 31st December 2020 for two divisions is shown below. D 53,000,000 E 15,000,000 17,500,000 3,900,000 Sales Operating controllable) profit Non-current assets (Net Book Value) 82,500,000 34,500,000 Current assets less current liabilities 28,500,000 22,600,000 a) Discuss whether the managers of divisions D and E are likely to invest in the new machinery. You should support your discussion with suitable calculations. (Maximum 200 words, excluding calculative work). (8 marks) Although historically investment decisions have been made on the basis of calculating ROI for an investment opportunity, a newly appointed CFO argues that using residual income (RI) to make investment decisions would enable to overcome limitations of ROI associated with the shareholder wealth maximization (which is the main responsibility of SustFurniture). Required b) Calculate Rl of the new investment opportunity and explain why managers of divisions D and E are likely to accept or reject the proposed investments based on RI. Explain the new manager's argument with reference to the calculations in this question. (Maximum 100 words, excluding calculative work). (4 marks) Despite its sustainability focus, SustFurniture still uses financial performance measures to evaluate the performance of the organisation. However, the CEO has recently heard of an innovative SMA technique, namely the Balanced Scorecard (BSC), and considers implementing it in SustFurniture. Required: c) With the reference to relevant literature (e.g. Ridgway, 1956) critically evaluate the use of a single (financial) performance measure by the SustFurniture company. (Maximum 200 words). (7 marks) d) Critically evaluate how the implementation of BSC could be used to improve the performance management and measurement in the company SustFurniture. (Maximum 200 words). (6 marks) e) For each of the perspectives of the Balanced Scorecard propose TWO measures that are appropriate for the company SustFurniture. Additionally, recommend how SustFurniture could modify the standard BSC to better reflect its vision. (Maximum 100 words for the recommendation, i.e. excluding your proposed measures). (8 marks) (Total marks 33)