Question B4 Great Western Footwear Ltd, hereafter GWF, is a large organisation with two divisions producing and selling nationwide a wide range of boots and sport shoes respectively. Recently, GWF added the third division by purchasing a company specialising in business shoes. In response to such corporate growth and diversification, the top management of GWF is reconsidering the way that the company evaluates the performance of divisions, which is currently based on divisional profits after depreciation on a straight-line basis. During the consultation process, on the one hand, the manager of the boots division whose business has been stable over the past few decades suggested to use return on capital employed based on current assets, excluding cash, and non-current assets at net book value [ROCE 1]. On the other hand, the manager of the sport shoes division whose business is less stable and thus requires frequent facility renewal suggested to use retum on capital employed similar to ROCE 1 but valuing non-current assets at original cost [ROCE 2]. Meanwhile, the newly recruited manager of the business shoes division who recently completed an MBA programme suggested to use a residual income approach [RI]. REQUIRED (a) Critically evaluate the three suggestions made by each manager. In your answer, you should refer to the advantages and disadvantages of each method, relate your discussions as much as possible to the specific context in which GRF is situated, state your assumptions as much as possible, and give a clear recommendation to the top management (20 marks) (b) The top management of GRF is also considering linking the managers' rewards to the performance evaluation of divisions. Briefly discuss whether or not this is a sensible idea. (5 marks) Total 25 marks Question B4 Great Western Footwear Ltd, hereafter GWF, is a large organisation with two divisions producing and selling nationwide a wide range of boots and sport shoes respectively. Recently, GWF added the third division by purchasing a company specialising in business shoes. In response to such corporate growth and diversification, the top management of GWF is reconsidering the way that the company evaluates the performance of divisions, which is currently based on divisional profits after depreciation on a straight-line basis. During the consultation process, on the one hand, the manager of the boots division whose business has been stable over the past few decades suggested to use return on capital employed based on current assets, excluding cash, and non-current assets at net book value [ROCE 1]. On the other hand, the manager of the sport shoes division whose business is less stable and thus requires frequent facility renewal suggested to use retum on capital employed similar to ROCE 1 but valuing non-current assets at original cost [ROCE 2]. Meanwhile, the newly recruited manager of the business shoes division who recently completed an MBA programme suggested to use a residual income approach [RI]. REQUIRED (a) Critically evaluate the three suggestions made by each manager. In your answer, you should refer to the advantages and disadvantages of each method, relate your discussions as much as possible to the specific context in which GRF is situated, state your assumptions as much as possible, and give a clear recommendation to the top management (20 marks) (b) The top management of GRF is also considering linking the managers' rewards to the performance evaluation of divisions. Briefly discuss whether or not this is a sensible idea. (5 marks) Total 25 marks
