Question 2 Grand Luxury Group (GLG) is a large hospitality company. It has two divisions: Red Hotel and Blue Hotel. Both hotels work independently with little intervention from the central management. GLG measures the performance of its divisions using the return on investment (ROI), which is calculated using controllable profit and divisional net assets. GLG sets 18% as the target ROI for each of the divisions. Divisional managers will receive a bonus if the divisional ROI exceeds the target ROI. The budgeted operating statement for the year 2021 is as follows: I Sales revenue Less: Variable costs Contribution Less: Fixed costs Net profit Controllable net assets Red Hotel RM000 9.700 (3.100) 6,600 (1.950) 4,650 22,000 Blue Hotel RM000 15,600 (5.800) 9.800 (3.120) 6,680 54.000 Additional information is available as follows: 1 The variable costs comprise operating expenses for running the hotels such as payroll expenses. decoration, guest supplies, linen, meals, etc. Fixed costs comprise the Group's secretarial and general office salaries of RM1.700,000 to be apportioned to Red Hotel and Blue Hotel on the ratio of 19 respectively. des synonym Net profit Controllable net assets 4,650 22,000 6,680 54,000 Additional information is available as follows: 1. The variable costs comprise operating expenses for running the hotels such as payroll expenses, decoration, guest supplies, linen, meals, etc. 2. Fixed costs comprise the Group's secretarial and general office salaries of RM1,700,000 to be apportioned to Red Hotel and Blue Hotel on the ratio of 1:9 respectively. 3. Fixed costs comprise Red Hotel and Blue Hotel's depreciation of RM400,000 and RM1,000,000 respectively. 20% of the depreciation costs in each hotel relates to assets controlled by the central management. Grand Luxury Group has a cost of capital of 10%. 4. I Question 2 (Continued) Required: (a) Calculate the return on investment (ROI) of each of the two hotels of the Grand Luxury Group. (5 marks) (b) Calculate the controllable profit margin of each of the two hotels of the Grand Luxury Group. (2 marks) Evaluate the performance of both hotels based on the calculations in parts (a) and (b) above and explain the possible behavioural issues that might arise. (7 marks) I (d) With relevant supporting calculations, explain how residual income (RI) can provide a better performance measurement compared to ROI. (7 marks) Explain TWO (2) disadvantages of adopting residual income (RI) to evaluate the performance of the Grand Luxury Group. (4 marks) [Total: 25 marks] Question 3 SILVER Sdn. Bhd. manufactures a single product, i3. The activity levels in the Assembly department vary every month. The company has prepared two provisional budgets for the quarter ended 31" March
