QUESTION 4

Cellular Phone company uses ROI to measure divisional performance. The company uses a Return on Investment (ROI) to measure and evaluate the divisional performance. The Dupont method is generally used. Annual ROI calculations for each division have traditionally employed the ending amount of invested capital along with annual operating income and net revenue. One of the company's division known as the Phone Accessories Division had the following results for the last two years:

2018 ROI* = ($2,000,000/$20,000,000) ($20,000,000/$10,000,000) = 0.20

2019 ROI* = ($2,400,000/$25,000,000) ($25,000,000/$15,000,000) = 0.16

*Note: ROI = Net Income/Sales Sales/Total Assets

Corporate management was disappointed in the performance of the division for 2019, since it had made an additional investment in the division that was budgeted for a 23% ROI. Besides, company uses "total cost plus" pricing technique. Recent results show that profits are falling and that the company is losing market share in what is becoming a very competitive market.

(a)Explain the meaning of "total cost plus" pricing technique and state TWO disadvantages of adapting such pricing technique.(4 marks)

(b)Explain how target costing could be of benefit to Cellular Phone.(8 marks)

(c)Explain why is it important to distinguish between the performance of a manager and the performance of the division for which the manager is responsible. Illustrate your answers with examples.(7 marks)

(d)Explain THREE factors that may have contributed to the decrease in ROI for 2019.