Question
Jamaica Producer Company operates a farm in St Mary that has two operating divisions headed by two separate managers that report on a decentralized
Jamaica Producer Company operates a farm in St Mary that has two operating divisions headed by two separate managers that report on a decentralized basis to head office in Kingston. The manager of each farm is accountable for all investments decisions and obtains funding for new investments based on the groups WACC. Hence head office typically judges' performance of managers based on division's ROI achieved each year. Their results for 2014 were as follows: Sales Operating Income Asset Base Weighted average cost of capital Required: Compute the following for each division for 2014: (a) Return on investment (ROI). Banana Coffee S(000) (000) 150,000 300,000 15,000 25,000 75,000 150,000 12% 12% (2 marks) (b) Residual income (RI) if the desired rate of return is 20 per cent. (5 marks) (c) Economic value added (EVA), if the desired rate of return is 20 per cent. (4 marks) (d) Comment on the results of each division using the measures of performance computed in requirements (a- c) above, bearing in mind Head Offices' performance evaluation method. (5 marks)
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