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Mr Ramesh is concern with the divisional performance evaluation approach in the Group and has decided to critically analyse it by using the Garment Division

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Mr Ramesh is concern with the divisional performance evaluation approach in the Group and has decided to critically analyse it by using the Garment Division as an example for this purpose. Each division has significant operating autonomy except that they are not permitted to undertake new capital investments (except for the purchase of items costing below RM2, 000 each). They have considerable freedom and decision making power to expand or contract their operations by undertaking new contracts with customers or discontinuing existing contracts. Each division uses divisional net profit before tax as the performance measure for the annual financial review. For the Garment Division, the financial results were calculated as follows for last year: RM Sales 1,580,000 Costs 1,160,000 Divisional net profit before tax 420,000 You, as a management accountant are surprised to find that the normal calculation of divisional net profit is presented in such an aggregated manner. After much investigation, you discovered that the RM 1,160,000 costs are made up of the following: RM 250,000 of short-term rental payments in consequence of the high frequency of renting extra production equipment or trucks for a half year period only. RM 530,000 of variable production and distribution costs. RM 170,000 salary of the division manager; and it is an avoidable cost if the division would have closed down. RM 210,000 a "fair share" of corporate expenses incurred at Group Headquarters and now allocated to Garment Division. There is no connection with the manner in which the allocated corporate expenses be influenced by Garment Divisional activities

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