Repair2U Ltd (the company) is a subscription-based warranty company that sells to customers in two regions of the United Kingdom (Bartshire and Wessex). Customers pay a set annual charge to buy a subscription, and in return they receive a home maintenance plan. This covers a range of household appliances (including refrigerators, dishwashers, clothes dryers, ovens and stoves, washing machines, and microwave ovens) as well as built in systems (such as electrics, plumbing and heating, doorbells, smoke detectors, and air-conditioning). Once a customer has subscribed to become a member, Repair2U Ltd will pay to repair or replace covered appliance or systems breakdowns. Having a subscription-based warranty saves Customers the hassle of finding a reliable tradesperson at a reasonable price, and in the long run it can save customers money. Repair2U is structured into two divisions, the Bartshire division and the Wessex division. Each division has a Divisional Manager who is responsible for revenue, cost and investment decisions within their region. A bonus is awarded each year to the Divisional Manager that generates the higher controllable Return on Investment (ROI). The following summary information shows the results of the divisions for the past two years. Question 1 continues on the next page. 5R6Z0041_2021_R Page 4/11 Question 1 continued. Year ending 31st December Bartshire Wessex 2019 2020 2019 2020 '000 '000 '000 '000 Revenue (see note 1 below) 4,704 4,375 8,064 8,145 Cost of Sales (2,728) (2,363) (4,677) (4,765) Gross Profit 1,976 2,012 3,387 3,380 Other Operating costs (see note 2 below) (950) (910) (1,826) (1,826) Head Office Recharges (see note 3 below) (100) (100) (300) (300) Operating Profit 926 1,002 1,261 1,254 Capital employed (see notes (4) and (5) below) 6,700 6,200 10,000 8,980 Number of annual subscriptions sold 7,000 6,510 12,000 12,120 Brand Awareness within the Region (note 6 below) 90% 83% 91% 95% Notes: 1. Revenue is comprised largely of income from monthly subscriptions. 2. Other operating costs are comprised of asset depreciation and advertising costs 3. The only items in the above statement of results which are deemed uncontrollable by the Divisional Managers is the Head Office Recharges all other items within the statement are controllable. 4 Repair2U Ltd uses net book value of non-current assets as the capital employed. The capital employed figures in the above table are the net book value of the non-current assets of each division at the end of the year. 5. Non-current assets are depreciated on a straight-line basis over the life of the assets. There were no additions or disposals of noncurrent assets during the years 2019 and 2020. 6. Brand Awareness within the Region represents the percentage (%) of potential customers within each region who are estimated to be are familiar with the qualities or image of Repair2U Ltds services. 7. Both divisions have a cost of capital of 12%. 8. You should ignore taxation and inflation. 5R6Z0041_2021_R Page 5/11 Required: (a) Discuss the relative performance of the two divisional managers using Return on Investment and other performance measures that you think are appropriate. (15 marks) At the beginning of 2020 Wessex Division was offered an immediate opportunity to invest in new equipment at a cost of 1.8 million. The new equipment was expected to have a useful economic life of nine years, after which it could have been sold for 200,000. In line with Repair2Us policy, Wessex Division would depreciate the new machinery on a straight-line basis over the life of the asset. The new equipment was expected to expand Wessexs Divisions capacity, resulting in a 10% increase in Gross Profit each year. However, as he used ROI as the basis of the decision, the Wessex Divisional Manager decided to reject the investment. In 2020, Wessex divisions Budgeted and Actual results were identical. (b) Recalculate Division Ws controllable ROI for the year ended 31 December 2020 after adjusting for the investment and, state whether the decision that was made was in the best interests of the company as a whole. (6 marks) (c) Explain ONE advantage and ONE disadvantage of each division being charged an apportionment of Repair2Us head office costs. (4 marks)