Question 1 SG Cooler manufactures and installs air-conditioning systems for commercial clients. SG Cooler started its operations in 1998 in the western region, but had since expanded its businesses to the eastern region in 2014. The market for air-conditioning systems has been expanding over the past decade. The directors of SG Cooler have set the companys goals to be the market leader; and to strive to deliver the best quality air-conditioning system that produces the coolest and cleanest air. To achieve its goals, SG Cooler relies on a strategy of continuous innovation to produce quieter and energy-conserving air-conditioner models. The company also invests in marketing efforts to create awareness of its state-of-the-art products. In 2017, the directors of SG Cooler decided to implement a divisional structure to facilitate management control and performance evaluation of the companys operations. As a result, two divisions - the western and eastern divisions - were created.

The following information is available: (1) Operating assets ($'000s) of SG Cooler as at 31 Dec were as follows: 2019 2018 2017 Westem Eastern Western Eastern Western Eastern 39,375 73.125 36.225 67.275 35,000 65,000 23,625 43.875 23,275 43,225 21.000 39,000 Division Non-current assets (carrying amount) Operating current assets Total operating assets Non-current assets acquired during the year 63.000 117,000 59,500 110,500 56,000 104.000 7,525 13,975 5,250 9,750 Notes: There were no disposals of non-current assets during the above periods. Depreciation was charged at 10% per annum on an accelerated basis in respect of all non-current assets held at the end of the year. Depreciation is the only non-cash expense. (ii) For the years ended 31 Dec 2018 and 2019, sales turnover and operating cashflows were as follows: $'000s Division Sales turnover Operating cashflows 2019 Western Eastern 84.000 120,000 21,000 30,000 2018 Western Eastern 74,000 110,000 18,500 27,500 (iii) Each division has a target ROI of 20% on average operating assets each year. The managers of both divisions are entitled to receive an annual bonus under a management incentive scheme if the target rate of ROI is achieved for their division. (iv) Ignore taxation and inflation. Given that SG Cooler's mission is ultimately to maximise shareholder wealth, the directors currently use total shareholder return as the measure of overall corporate performance. The CEO is concerned about the compatibility of ROI (used to evaluate the performance of divisions) with the overall measure of corporate performance (total shareholder return) Part A (a) Compute the ROI (using average operating assets) achieved by each division for the years ended 31 Dec 2018 and 2019, rounded to two decimal places of a percent. The following information is available: (1) Operating assets ($'000s) of SG Cooler as at 31 Dec were as follows: 2019 2018 2017 Westem Eastern Western Eastern Western Eastern 39,375 73.125 36.225 67.275 35,000 65,000 23,625 43.875 23,275 43,225 21.000 39,000 Division Non-current assets (carrying amount) Operating current assets Total operating assets Non-current assets acquired during the year 63.000 117,000 59,500 110,500 56,000 104.000 7,525 13,975 5,250 9,750 Notes: There were no disposals of non-current assets during the above periods. Depreciation was charged at 10% per annum on an accelerated basis in respect of all non-current assets held at the end of the year. Depreciation is the only non-cash expense. (ii) For the years ended 31 Dec 2018 and 2019, sales turnover and operating cashflows were as follows: $'000s Division Sales turnover Operating cashflows 2019 Western Eastern 84.000 120,000 21,000 30,000 2018 Western Eastern 74,000 110,000 18,500 27,500 (iii) Each division has a target ROI of 20% on average operating assets each year. The managers of both divisions are entitled to receive an annual bonus under a management incentive scheme if the target rate of ROI is achieved for their division. (iv) Ignore taxation and inflation. Given that SG Cooler's mission is ultimately to maximise shareholder wealth, the directors currently use total shareholder return as the measure of overall corporate performance. The CEO is concerned about the compatibility of ROI (used to evaluate the performance of divisions) with the overall measure of corporate performance (total shareholder return) Part A (a) Compute the ROI (using average operating assets) achieved by each division for the years ended 31 Dec 2018 and 2019, rounded to two decimal places of a percent