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Required (a) The directors of HWG have asked you, as management accountant, to prepare a report providing them with explanations as the followings ( Which of the three centres is the most successful? Your report should include the commentary on return on investment (ROI), residual income (RI and economic value added (EVA) 8s measures of financial performance. Detailed calculations regarding each of these three measures must be included as part of your report; Note: a maximum of seven marks is available for detailed calculations. (14 marks) (w) The percentage change in revenue, total costs and net assets during the year ended 31 May 2019 that would have been required in order to have achieved a target ROI of 20 percent by the Johannesburg centre. Your answer should consider each of these three variables in insolation. State any assumptions that you make (6 marks) ( Whether or not you agree the stater of the marketing director note (9) above 15 marks) 51 Page Professional marks for appropriateness of format, style and structure of the report (4 marks) (b) The Fitness Co. (FC), which is well established in South Africa, operates nine centres. Each of FC's centres is similar in size to those of HWG. FC also provides dietary plans and fitness programmes to its clients. The directors of HWG have decided that they wish to benchmark the performance of HWG with that of FC Required Discuss the problems that the directors of HWG might experience in their wish to benchmark the performance of HWG with the performance of FC, and recommend how such problems might be successful addressed 7 marks) I Total 36 marks] Non-current liabilities Long-term borrowings Total non-current assets 1 800 1 800 240 240 3181 480 480 Current liabilities Total current liabilities Total liabilities Total equity and liabilities 800 800 2 600 9 500 2. HWG defines residual income (RI) for each centre as operating profit minus a required rate of return of 12 percent of the total assets of each centre. 3. At present HWG does not allocate the long-term borrowings of the group to the three separate centres. 4. Each centre faces similar risks. 5. Tax is payable at a rate of 30 percent. 6. The market value of the equity of capital of HWG is R9 million, the cost of the equity HWG is percent. 4 Page 7. The market value of the long-term borrowings of HWG is equal to the book value. 8. The directors are concerned about the return on investments (ROI) generated by the Johannesburg centre and they are considering using sensitivity analysis in order to show how a target ROI of 20 percent might be achieved. 9. The marketing director stated at the recent board meeting that 'The Group's success depends on the quality of service provided to our clients. In my opinion, we need only to concern ourselves with the number of complaints received from clients during each period as this is the most important performance measure for our business. The number of complaints received from clients is a perfect performance measure. As long as the number of complaints received from clients is not increasing from period to period, then we can be confident about our future prospects. Divisional performance evaluation using ROL, RI and EVA The Health and Wellness Group (HWG), which is privately owned, operates three centres in the country of South Africa. Each centre offers dietary plans and fitness programmes to clients under the supervision of dieticians and fitness trainers. Residential accommodation is also available at each centre. The centres are located in the Durban, Johannesburg, and Cape Town The following information is available: 1. Summary financial data for HWG in respect of the year ended 31 May 2019. Durban Johannesburg Cape Town R000 R000 R000 Total R000 2 100 Revenue Fees received Variable costs Contribution Fixed costs Operating profit Interest costs on long-term debt at 10% Profit before tax Income tax expense Profit for the year 1 800 1468) 1332 1963) 396 8 400 (2430) 5970 4500 (1395) 3105 12.402) 703 1 533 (10921 441 1540 1801 1 350 1000 31 Page Average book values for 2019 1 000 6800 Assets Non-current assets Current assets Totalets 2 500 900 31400 3300 1000 4300 2 700 9.500 1 800 2 500 Equity and liabilities Share capital Retained earnings Total equity 6.902 Required (a) The directors of HWG have asked you, as management accountant, to prepare a report providing them with explanations as the followings ( Which of the three centres is the most successful? Your report should include the commentary on return on investment (ROI), residual income (RI and economic value added (EVA) 8s measures of financial performance. Detailed calculations regarding each of these three measures must be included as part of your report; Note: a maximum of seven marks is available for detailed calculations. (14 marks) (w) The percentage change in revenue, total costs and net assets during the year ended 31 May 2019 that would have been required in order to have achieved a target ROI of 20 percent by the Johannesburg centre. Your answer should consider each of these three variables in insolation. State any assumptions that you make (6 marks) ( Whether or not you agree the stater of the marketing director note (9) above 15 marks) 51 Page Professional marks for appropriateness of format, style and structure of the report (4 marks) (b) The Fitness Co. (FC), which is well established in South Africa, operates nine centres. Each of FC's centres is similar in size to those of HWG. FC also provides dietary plans and fitness programmes to its clients. The directors of HWG have decided that they wish to benchmark the performance of HWG with that of FC Required Discuss the problems that the directors of HWG might experience in their wish to benchmark the performance of HWG with the performance of FC, and recommend how such problems might be successful addressed 7 marks) I Total 36 marks] Non-current liabilities Long-term borrowings Total non-current assets 1 800 1 800 240 240 3181 480 480 Current liabilities Total current liabilities Total liabilities Total equity and liabilities 800 800 2 600 9 500 2. HWG defines residual income (RI) for each centre as operating profit minus a required rate of return of 12 percent of the total assets of each centre. 3. At present HWG does not allocate the long-term borrowings of the group to the three separate centres. 4. Each centre faces similar risks. 5. Tax is payable at a rate of 30 percent. 6. The market value of the equity of capital of HWG is R9 million, the cost of the equity HWG is percent. 4 Page 7. The market value of the long-term borrowings of HWG is equal to the book value. 8. The directors are concerned about the return on investments (ROI) generated by the Johannesburg centre and they are considering using sensitivity analysis in order to show how a target ROI of 20 percent might be achieved. 9. The marketing director stated at the recent board meeting that 'The Group's success depends on the quality of service provided to our clients. In my opinion, we need only to concern ourselves with the number of complaints received from clients during each period as this is the most important performance measure for our business. The number of complaints received from clients is a perfect performance measure. As long as the number of complaints received from clients is not increasing from period to period, then we can be confident about our future prospects. Divisional performance evaluation using ROL, RI and EVA The Health and Wellness Group (HWG), which is privately owned, operates three centres in the country of South Africa. Each centre offers dietary plans and fitness programmes to clients under the supervision of dieticians and fitness trainers. Residential accommodation is also available at each centre. The centres are located in the Durban, Johannesburg, and Cape Town The following information is available: 1. Summary financial data for HWG in respect of the year ended 31 May 2019. Durban Johannesburg Cape Town R000 R000 R000 Total R000 2 100 Revenue Fees received Variable costs Contribution Fixed costs Operating profit Interest costs on long-term debt at 10% Profit before tax Income tax expense Profit for the year 1 800 1468) 1332 1963) 396 8 400 (2430) 5970 4500 (1395) 3105 12.402) 703 1 533 (10921 441 1540 1801 1 350 1000 31 Page Average book values for 2019 1 000 6800 Assets Non-current assets Current assets Totalets 2 500 900 31400 3300 1000 4300 2 700 9.500 1 800 2 500 Equity and liabilities Share capital Retained earnings Total equity 6.902