This question contains two (2) unrelated parts Answer all questions Describe four (4) characteristics of a strategic performance measurement system (4 markah marks ) Fancy Flower evaluates its department on the basis of ROI (return on investment), as a performance measure with investment defines as the average of the balance of the beginning and end of year assets Management bonuses are also based on ROI All investments in operating assets are expected to earn a minimum rate of return of 11 Tulip Department, one of Fancy Flower investment centers, has ROI which ranged from 14 to 17 During the past year, Tulip had an investment opportunity that would yield an estimated rate of return of 13 Tulips management decided against the investment because it believed the investment would decrease the departments overall ROI Last years income statement for Tulip Department is given below The departments operating assets employed were RM12,960,000 at the end of the year, which represents an 8 increase over the previous year end balance Tulip Department Income Statement for the year ended December 31 RM RM Sales 31,200,000 Cost of goods sold 16,500,000 Gross margin 14,700,000 Less operating expenses Selling expenses 5,620,000 Administrative expenses 7,208,000 12,828,000 Net operating income RM1,872,000 Required a) Compute (i) Return on investment (ROI) and (ii) Residual income (RI) as performance measures for Tulip Department (4 markah marks ) b) Why do you think the management of Tulip had rejected the investment opportunity, when the decision is made based on ROI calculation Explain (3 markah marks ) c) Would the management of Tulip Department have been more likely to accept the investment opportunity it had last year if residual income were used as a performance measure instead of ROI Explain (3 markah marks ) d) The Tulip Department is a separate investment center within Fancy Flower Identify the items Tulip must be free to control if it is to be evaluated fairly, other than using the ROI or residual income performance measures (2 markah marks ) e) Provide two (2) examples of situations where the use of ROI can lead to decisions which may harm the future competitiveness of a company (4 markah marks )

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This question contains two (2) unrelated parts. Answer all questions. Describe four (4) characteristics of a strategic performance measurement system. (4 markah/ marks ) Fancy

This question contains two (2) unrelated parts. Answer all questions.

Describe four (4) characteristics of a strategic performance measurement system.

(4 markah/marks)

Fancy Flower evaluates its department on the basis of ROI (return on investment), as a performance measure with investment defines as the average of the balance of the beginning and end of year assets. Management bonuses are also based on ROI. All investments in operating assets are expected to earn a minimum rate of return of 11%.

Tulip Department, one of Fancy Flower investment centers, has ROI which ranged from 14% to 17%. During the past year, Tulip had an investment opportunity that would yield an estimated rate of return of 13%. Tulips management decided against the investment because it believed the investment would decrease the departments overall ROI.

Last years income statement for Tulip Department is given below. The departments operating assets employed were RM12,960,000 at the end of the year, which represents an 8% increase over the previous year-end balance.

*Tulip Department* *Income Statement for the year ended December 31*
	RM	RM
Sales		31,200,000
Cost of goods sold		16,500,000
Gross margin		14,700,000
Less operating expenses:
Selling expenses	5,620,000
Administrative expenses	7,208,000	12,828,000
Net operating income		RM1,872,000

Required:

a) Compute (i) Return on investment (ROI) and (ii) Residual income (RI) as performance measures for Tulip Department.

(4 markah/marks)

b) Why do you think the management of Tulip had rejected the investment opportunity, when the decision is made based on ROI calculation? Explain.

(3 markah/marks)

c) Would the management of Tulip Department have been more likely to accept the investment opportunity it had last year if residual income were used as a performance measure instead of ROI? Explain.

(3 markah/marks)

d) The Tulip Department is a separate investment center within Fancy Flower. Identify the items Tulip must be free to control if it is to be evaluated fairly, other than using the ROI or residual income performance measures.

(2 markah/marks)

e) Provide two (2) examples of situations where the use of ROI can lead to decisions which may harm the future competitiveness of a company.

(4 markah/marks)