Suggested Solution to The MakeMore Bread Group. Main Report Part (a) Controllable Return on Capital Employed (ROCE) has alternative definitions, but in the context of measuring the performance of DMs the following definition is recommended: ROCE - controllable divisional profit divided by controllable investment in net assets. Opening investment, year end investment or average investment could be used. None is ideal as all are affected by the timing of investments. (In this case we only have details of year end investment and so that must be used in the calculations) So what is controllable divisional profit and controllable investment at Grain and Bakery? MakeMore Bread divisions appear to be recognized as investment centers, and this seems appropriate as managers have considerable influence over capital expenditure decisions Although capital expenditure has to be authorized by CM, either through budgets or through investment appraisal procedures, divisional managers argue the case for their desired level of capital expenditure. Once capital expenditure has been authorized DMs manage the investment and the division benefits from it. It is therefore appropriate to treat the depreciation expense and the investment cost associated with a division's non-current assets as "controllable. The only income statement item that is not "controllable' by DMs is allocated head office costs. It is unlikely that DMs can influence head office costs. The level of such costs can only be fully controlled at head office and they are probably "allocated' to divisions on some arbitrary basis. It is possible that some head office costs do vary with the level of activity at divisions, but in the absence of any evidence that head office costs are accurately 'traced' to divisions (e-g using activity based methodology) we must assume they are "allocated' in a relative arbitrary way and are therefore not controllable by DMs. For measuring DMs performance the divisional ROCE should be calculated using divisional profit before charging allocated head office costs. The calculation is as follows: Grain Bakery Divisional Profit (in $000s) 3.260 1.741 HO costs (in $000s) 440 259 Controllable Divisional Profit (in $000s) 3,700 2.000 Controllable Divisional Investment (in $000s) 18,500 12,500Grain Bakery $000 $000 44,000 Sales 25,900 Operating expenses: Direct Labour 8,700 7,950 Direct Materials 25,600 10,300 Depreciation 700 1,100 Divisional overheads 5,300 4,550 Head office costs (allocated) 440 259 40,740 24, 159 Divisional Profit 3,260 1,741 Grain Bakery $000 $000 Non-current assets (at NBV) 10,000 9,000 Current assets 11,500 5,500 Current liabilities 3,000 2,000Grains $000 Direct labour 1,779 Direct materials 5,234 Depreciation 143 Divisional overheads 1% Total 8,240 Plus 25% mark up 2,060 Transfer sales 10,300