Company XYZ has 3 subsidiaries A, B, and C and that the company does not allocate corporate headquarters costs or interest on long-term debt to the subsidiaries. Summary of the results are as follows.

Ksh000

Ksh000

Ksh000

Ksh000

Ksh000

A

B

C

H

Total

Operating y income

2,400

3,000

4,800

10,200

Variable cost of H

800

Fixed costs of H

1,200

Interest on L.T debt

4,000

(6,000)

Income before taxation

4,200

Taxes

1,500

Income after taxation

2,700

Average book values

Current assets

4,000

5,000

6,000

2,000

17,000

Fixed assets

6,000

15,000

24,000

3,000

48,000

65,000

Required:

Compute the return on investment. (5 marks)

Compute residual income assuming that the company requires a 10% interest on total assets of each subsidiary. (5 marks)

c) Assume that there is an asset available to subsidiary A which costs kshs1000,000 but which has an annual profit of kshs 200,0000. Advice the manager of A on whether to undertake the project and comment on whether this decision is in line with the overall objective of the organization. (5 marks)