Question 2. PMC LLP are the one of the top 100 UK accounting firms by fee income. They have structured themselves as having three main divisions in the UK and a Head Office based in London. They been having problems working out appropriate costing for the three divisions and have the following details: Division A Division B Division C Head Office 2500 20 m -10 m 4 000 50 m -30 m 1 200 15 m - 5 m -1.7 m -3.5 m -1.2 m Clients Sales Direct costs Overheads Legal IT Marketing Cost Drivers Contract discussions Targeted marketing campaigns Computers/laptops 400 300 150 25 30 45 100 200 300 REQUIRED: i) Work out the profitability of each division - 1. Absorbing Head office costs using client numbers; 2. Absorbing Head office costs using the cost drivers. Evaluate the difference between absorbing costs per client and Activity Based Costing. [15 Marks] ii) Abacus LLP are another accounting firm that currently has non-current asset value of 2m and capital employed of 5m and earns an annual profit after depreciation of 2.15m. The managing partner is considering investing 1.5m. As is normal policy for all assets, they will have a ten-year life with no residual value and earn an annual profit after depreciation of 130,000. The cost of capital is 8%. REQUIRED: Use an Excel spreadsheet to calculate the following and comment on the results. a) The return on Abacus LLP investment, before and after the new investment b) The Abacus LLP residual income before and after the new investment. [15 Marks] TOTAL 30 MARKS