Question 4

Ghana Post Company Ltd has two divisions, EMS and the Postal division. Ghana Post Company Ltd intends to increase its investment in EMS and Postal division by GHS10,000 each. The increase in investment is expected to increase net income by GHS18,000 and GHS20,000 in EMS and Postal respectively. Currently, the assets structure of both EMS and Postal is analysed below:

EMS Postal

GHS GHS

Investment

Motor vehicles 70,000 180,000

Buildings 30,000 120,000

Scales/Equipment 20,000 100,000

120,000 400,000

Current Asset

Stamps 25,000 50,000

Stationary 45,000 80,000

Debtors 80,000 70,000

Bank 130,000

60,000 330,000

Current liabilities 210,000

Creditors 10,000 200,000 20,000 310,000

320,000 710,000

Current Revenue for both EMS and Postal are GHS364,000 and GHS692,000 respectively. Total expenses as a percentage of revenue are 80.2% and 88.2% for EMS and Postal respectively. Assume cost of Ghana Post is 15% and the company evaluates its managers based on return on investment (ROI) and Residual Income (RI).

Required:

1. Calculate ROI before and after the expansion.
2. Using the cost of capital, determine the residual income before and after the expansion.
3. Should management of Ghana Post invest in the expansion? Give reasons

1. Describe the main characteristics and objective of profit and investment centres.
2. Explain conditions necessary for the successful introduction of both profit and investment centres.