Star Steel produces a range of steel alloy products used in domestic, commercial and industrial premises. Due to the different markets that they operate in they have divisionalised into three autonomous departments, Domestic, Commercial and Industrial. They have just reported their results for the year ended 30th June 2020, which are shown below.

000

Division Domestic Commercial Industrial Total

Sales 1,900 1,600 1,200 4,700

Operating Profit 600 300 200 1,100

Capital Employed 2,500 1,200 1,800 5,500

The company rewards divisional mangers on the basis of the Return on Capital Employed and has a Cost of Capital of 16%.

You may assume that the company does not pay corporation tax.

Required:

1. For each division calculate

1. The Return on Capital Employed
2. The Operating Profit Margin
3. The Asset Turnover Rate

6. marks

2. Utilising the calculations in (a) comment on the profitability of each of the divisions and identify potential reasons why their results may differ.

5 marks

3. It has been put forward that the domestic division should expand its product range. New Investment would cost 500,00 and generate an additional 80,00 in profit. As the manager of the Domestic Division would you recommend that this opportunity be invested in.

4 marks

d) Utilising the calculations in part (c) critically appraise the use of Return on Capital Employed as a measure of Divisional Manager performance.

6 marks

e) Using the Companys Cost of Capital, calculate the Residual Income of each division and for the additional investment described in part (c).

4 marks

f) Utilising your calculations in part (d) explain why Residual Income may be a superior measure of a Divisional Manager performance.

5 marks