Exercise 2

A. Angkut Simpan Bhd. (ASB) provides logistics services through its two operating divisions. The following financial information is available for the first quarter of 2019:

	Cold Supply Division	Trucking Division
Total assets (RM)	12,400,000	17,300,000
Current liabilities (RM)	2,620,000	3,633,000
Revenues (RM)	11,250,000	15,800,000
Operating Expenses (RM)	1,762,500	2,445,800
Gross margin (% of revenues)	25%	24%

ASB has been using return on investment (ROI) and residual income to measure its division performance with a required rate of return of 9%. However, effective the first quarter of 2019, the top management has decided to also use economic value added (EVA). ASB uses two sources of funds as follows:

	Market value (RM)	Cost rate
Long-term debt	9,500,000	7%
Equity capital	13,960,000	10%

Income tax rate is 25%.

REQUIRED:

(a) Calculate for each division's first quarter of 2019 performance the following:

i. ROI

ii. Residual income

iii. Economic Value Added (EVA)

(b) Discuss by giving TWO (2) possible reasons why the top management of ASB decided to introduce EVA for performance measurement.

B. Baganza Sdn. Bhd. (BSB) has a number of divisions which operate as a separate profit centre including Parts Division and Audio Division. The Audio Division produces a line of MP3 players which require component AZ. Currently, it purchases this component from an outside supplier for RM6.50 per component. The manager of the Parts Division has approached the manager of the Audio Division about selling component AZ to the Audio Division in the second half of year 2019. The full product cost of component AZ is as follows:

	(RM)
Direct materials	1.00
Direct labour	0.50
Variable manufacturing overhead	1.00
Fixed manufacturing overhead	1.60
Total unit cost	4.10

The Audio Division needs 18,000 component AZ for the second half of the year 2019. Although the Parts Division has been operating at capacity (60,000 components per year), it expects to produce and sell only 45,000 components for RM6.50 each for the year 2019. The BSB policy is that all transfer prices are negotiated by the divisions involved.

REQUIRED:

(a) Determine the transfer price and the division which sets it for the following:

(i) Minimum (floor)

(ii) Maximum (ceiling)

(b) Analyse the effect on operating income, if the negotiating divisions agree on a transfer price of RM5.75, for the following:

(i) Parts Division

(ii) Audio Division

(iii) BSB as whole.