Question 1 (20 marks) The HFG Ltd operates three centres in the country of Maryland. Each centre offers dietary plans and fitness programs to clients under the supervision of fitness trainers. Residential accommodation is also available at cach centre. The centres are located in the towns of Ayetown, Bectown and Ceetown. The company has a minimum required rate of return of 12%. At present, the company does not allocate long term liabilities to the three separate centres. The tax rate is 30%. The overall after tax weighted average cost of capital is 10.6%, which takes into account the relative weighting of both market value of equity and debt. Currently, the performance of a center manager is evaluated on the basis of Return on Investment (ROI). Each center calculates its ROI by using operating income (before interest and tax) divided by the total assets of the center. The marketing director stated that the Group's success depends on the quality of service provided to our clients and he believed that the number of compliant received from clients is a perfect performance measure. The following financial data for HFG in respect of the year ended 31 May 2022 Income Statement AYE BEETOWN CEETOWN $000 $000 S000 Total $000 Revenue 1800 2100 4500 8400 Variable costs (468) (567) (1395) (2430) Contribution 1332 1533 3105 Fixed costs (936) (1092) (2402) Operating income 396 441 703 5970 (4430) 1540 Interest cost on long term liabilities at 10% Operating Income before tax (180) 1360 Income tax expense (408) Net income 952 AYE Statement of Finanial Position BEETOWN CEETOWN Total Assets Non-current assets $1000 $2500 $3300 6800 Current assets 800 900 1000 2700 Total Assets 1800 3400 4300 9500 Equity and liabilities Share Capital Retained earnings 2500 4400 6900 Required: 1. 2. The CEO wants to know which of the three centres is the most "successful". Discuss with a commentary on Return on Investment (ROI), Residual Income (RI), and Economic Value Added (EVA) as a measure of financial performance. (Hints: You can make own assumption for the definition in these measures but need to be logical and consistent across the same measure) (9 marks) A consultant of the company is recommending a proposal to cach division manager to invest $600,000 in a new computerized production system. It is estimated that the new system will increase annual divisional sales of $1,600,000 and will incur divisional fixed expenses of $520,000 annually. Variable costs of the new system will average 60% of total revenue. a) Which centre manager (s) will be more likely to accept or reject this proposal? Why? (3 marks) b) Do you expect any goal conflict between each center and corporation based on the current performance evaluation system? Explain. (4 marks) 3 The marketing director stated that the number of compliant received from clients is the most important performance measure the company should include. Do you agree? Explain. (4 marks) Question 2 (12 marks) Stereo Goods is a distributor of videotapes. Video Mart is a local retail outlet which sells blank and recorded videos. Video Mart purchases tapes from Stereo Goods at $100 per tape. Video Mart does not inspect the tapes due to Stereo Goods' reputation for high quality. Annual demand is (320 days to be 6,400 tapes). The purchase-order lead time is 7 days. The following cost data are available: Required Relevant ordering costs per purchase order Carrying costs per unit per year: Relevant insurance, materials handling, breakage, etc., per year 1. Determine the economic order quantity $64 $ 2 (2 marks) per 2. Determine the appropriate level of safety stock, assuming stock out cost is $1 unit and the following estimated demand. (Assume a 10 unit-interval for each safety stock level increments) Total Demand (tapes) during purchase order lead time 120 130 140 150 160 Total Equity Non-current liabilities Long term liabilities Total non-current liabilities Current liabilities Total liabilities Total equity and liabilities 1800 80 240 480 800 2600 9500 Probability 20% 25% 30% 10% 15% (10 marks)