SECTION B: ANSWER ANY THREE (3) QUESTIONS Question 2 (25 marks) Stevenson Ltd, a garment retail company has two divisions, Division X and Division Y. Both divisions operate separately as an investment centre. The monthly operating statements of the divisions are used as a basis for performance measurement. Delvib The company's target return on investment (ROI) is 25% per annum and it has been the practice at both divisions to calculate ROI using controllable profit only. Following top management's decision in the previous month, each division is now required to deduct a share of head office costs before calculating the 'net profit', which is then used to calculate return on investment (ROI) but the company's target ROI has remain unchanged. Divisions X and Y have maintained ROIs of 27 % per annum and 27.5% per annum respectively over the last six months and bonuses were awarded to their employees. The budgeted operating statement for the month of April 2015 is shown below: Sales revenue Less variable costs Contribution Less controllable fixed costs Controllable profit Less apportionment of head office costs Net profit Division X Rs'000 2,400 (1,050) 1,350 (290) 1,060 (315) 745 Division Y Rs'000 2,750 (1,300) 1,450 (490) 960 (310) 650 Divisional net assets of X and Y are Rs41.5million and Rs39.8million respectively and Stevenson Ltd has a cost of capital of 11%. Required (a) Using both the old method and the new method, calculate the expected annualised Return on Investment based on the above budgeted operating statements, for each of the divisions and explain whether employees of both lo Page 2 of 12 250 Financial Management and Control - DFA 3021Y divisions management. will be awarded bonuses following the new method preferred by top [7 marks] (b) Mir Peter Duke, who has recently been appointed as the divisional manager of Division Y has argued that residual income (RI) is a better performance measurement tool than ROI. Based on the operating statements of April 2015, calculate the annualised residual income (RI) of both divisions using both the old method and the new method. WEVA MOIT [6 marks] (c) Discuss the expected performance of each division.osma nobeno [4 marks] vil noleibowdenri yusgrop dat nemoga bil nonosta sing leaders as verso lo antolaiyib to (d) Discuss the possible implications if top management insists in using net profit rather than controllable profit to assess divisional performance. [3 marks] ni ollo vino ang oldodno gnie Ostalo oleivih diad is a