QUESTION 3 (20 MARKS: 36 MINUTES)

MSport Sdn Bhd (MSSB) has two divisions that report on a decentralized basis. Their results for 2020 were as follows:

Racket

Ball

Sales

RM150,000

RM300,000

Cost of goods sold

RM70,000

RM120,000

Advertising expenses

RM32,000

RM75,000

Administrative expenses

RM30,000

RM55,000

Average operating asset

RM 75,000

RM150,000

Weighted average cost of capital

12%

12%

Tax

15%

15%

REQUIRED:

(a)Compute the following amounts for each division (show all workings):

i.Return on investment (ROI) if the desired rate of return is 12 percent.

(2 Marks)

ii.Residual income (RI) if the desired rate of return is 20 percent.

(4 Marks)

iii.Economic Value Added (EVA).

(2 Marks)

iv.Operating Asset Turnover if the desired rate of return is 25 percent.

(2 Marks)

(b)Based on the financial performance measures of the two divisions, justify the best division among them.

(2 Marks)

(c)Since it was launched, the performance measurement system in MSSB has focused only on financial measures that are the ROI, RI and EVA. Discuss ONE (1) inefficiency of financial performance measures for MSSB.

(2 Marks)

(d)Recommend TWO (2) possible strategies how to help helmet division to improve its RI and EVA.

(4 Marks)

(e)Discuss ONE (1) reason why do you think Helmet and Ball division have the same operating asset turnover despite of their differences in ROI, RI and EVA performance.

(2 Marks)