ROA is the standard measure used by Kan Enterprises for all its divisions. The median ROA in the air conditioning sector is 14%. The top quartile reports a ROA of 17% or more.

Table 1. Return on Assets

Asset

GBP

Budgeted profits for the year

10,575,000

Asset base at the start of the year

58,925,000

Budgeted asset base at the end of the year

69,500,000

Average asset base

64,212,500

ROA (using average of opening and closing assets)

16.5%

Note: ROA: Return on assets

• Bonus Ratchet

The agreement Kan Enterprises established with the team at MP was that when the ROA exceeds 15%, the Maple Products directors receive a bonus equal to 10% of salary. There is also an incentive ratchet, with a bonus of 15% of salary if ROA exceeds 18.5%, or a bonus of 20% of salary if ROA exceeds 22%.

The base bonus (10% of salary) results in directors' total remuneration being around the median for the sector. A bonus of 15% of salary puts the directors just below the top quartile for the sector, while a bonus of 20% of salary puts the directors just below the top decile for the sector.

Detail of Budgeted Profit for the Year

Table 2. Original Budgeted Profit for Year Ended 31 December

Units sold

3,900,000

Budget item (GBP)

Sales revenues - Europe 25.00 per unit 97,500,000 total

Variable costs

Direct materials 4.68 per unit 18,252,000 total

Direct labour 5.90 per unit 23,010,000 total

Variable production overhead 3.90 per unit 15,210,000 total

Variable selling expenses 2.00 per unit 7,800,000 total

Total variable costs 16.48 per unit 64,272,000 total

Income

Contribution from pumps 8.52 per unit 33,228,000 total

Net income from repairs and maintenance 1,050,000 total

Profits before fixed costs 34,278,000 total

Fixed costs

Fixed production overhead 5,551,000 total

Fixed selling expenses 8,567,000 total

Fixed administration costs 9,585,000 total

Total fixed costs 23,703,000

Budgeted profit for the year 10,575,000

The EMEA report noted that a new sales office had been set up in April for Maple Products using unoccupied space at Kan Enterprises' headquarters in Hong Kong, to take advantage of Kan Enterprises' contacts in the Asia-Pacific region. The estimate for sales in the Asia-Pacific region at the time of this development was in the order of 300,000 units from April to December (this would have resulted in 4,200,000 total units sold for the year). However, the sales office had been enormously successful, resulting in 600,000 units sold in the Asia-Pacific region, and therefore worldwide sales of 4,500,000 units for the year.

QUESTION 1

Using the budgeted data in Table 2, calculate (a) the total budgeted profits for sales of 4,200,000 units and 4,500,000 units and (b) the sales volume variance (differences in profits from the original budgeted profits) for sales of 4,200,000 units and 4,500,000 units. Note: Net income from repairs and maintenance is not expected to change with the increase in output because most new units do not require repairs or maintenance in the first year

QUESTION 2

Calculate the budgeted ROA for sales outputs of 4,200,000 and 4,500,000 units. Assume that any additional profits over the original budget will be invested in the business and therefore increase the budgeted closing asset base.