EXPLAIN

QUESTION 2: FINANCIAL PERFORMANCE

Total marks for this question: 25 marks

[Suggested time: 45 minutes]

Telum Ltd manufactures electronic devices and competes on the basis of quality and leading-edge designs. The company has $1,750,000 invested in assets in its Mobile Phone Division. After-tax operating profit from sales of mobile phones this year is $325,000. The Tablet Division has $6,000,000 invested in assets and an after-tax operating profit this year of $1,050,000. Income for the Mobile Phone Division has grown steadily over the past few years. The weighted-average cost of capital for Telum Ltd is 9% and the previous period's after-tax return on investment for each division was 13%. The CEO of Telum Ltd has told the manager of each division that the division that 'performs best' this year will get a bonus.

REQUIRED (Show all relevant workings; where appropriate)

1.For each division of Telum Ltd [use profit after tax in calculating (i) & (ii)]

(i)Calculate the ROI (4 marks)

(ii) Calculate the residual income(4 marks)

(iii)Briefly explain which manager will get the bonus(4 marks)

(iv)Provide one advantage and one disadvantage of each measure?

(4 marks)

2.The CEO of Telum LTd has recently heard of another measure similar to residual income called EVA. The CEO has the accountant calculate EVA - adjusted incomes of the Mobile Phone and Tablet Divisions, and finds that the adjusted after-tax operating profits are $700,000 and $1,300,000, respectively. Also, the Mobile Phone Division has $525,000 of current liabilities, whereas the Tablet Division has only $105,000 of current liabilities. Using the above information,

(i)Calculate EVA for each division

(Note: Use net assets as capital employed)

(4 marks)

(ii)Briefly discuss which divisional manager will get the bonus.

(2 marks)

3.What non-financial measures could Telum Ltd use to evaluate divisional performances? Suggest any three non-financial measures.(3 marks)