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QUESTION 3 Intan Auto Trading is a car dealer that has been in business for 10 years, dealing with selling and servicing new and pre-owned
QUESTION 3 Intan Auto Trading is a car dealer that has been in business for 10 years, dealing with selling and servicing new and pre-owned car. The business is organized into three departments; New Cars, Pre-owned Cars and Services. All three departments are shared under the same building. Costs of land and building are RM12.9 million. Departmental performance is based on return on investment (ROI). ROI is determined based on net income before tax over total net assets. The company's financial manager proposed to the board to use 16% weighted average cost of capital as the base for the evaluation. The company tax rate is 25 percent. The following table summarizes the land and building utilization by each department, other net assets invested and the department's net income before tax: New Cars Services Total Pre-owned Cars Percentage of land and building utilizations 50% 40% 10% 100% RM2,700,000 RM1,500,000 RM6,300,000 RM10,500,000 Other net assets Departmental net income before tax RM625,000 RM1,700,000 RM1,813,000 RM4,138,000 Required: a. Briefly explain two (2) objectives of decentralization. (5 marks) b. i. Determine the most profitable department based on return on investment (ROI). Show your calculations. (4 marks) ii. Comment on the performance of each department using Economic Value Added (EVA). Show your calculations
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