Timber Products Inc. (TPI) is a market leader in the supply of timber wood to the furniture

manufacturing industry. The company has two divisions. TPI's Timberland division manages forest land and sells timber wood as raw materials to furniture manufacturers. The other division - Manufacturing division - manufactures a range of panel products used to manufacture furniture.

3. Jul 2018 Semester Exam ()2 Timber Products Inc. (TPI) is a market leader in the supply of timber wood to the furniture manufacturing industry. The company has two divisions. TPI's Timberland division manages forest land and sells timber wood as raw materials to furniture manufacturers. The other division - Manufacturing division - manufactures a range of panel products used to manufacture furniture. The following information is available for the three-year period: (1) (i) Net Assets as at 31 December were as follows: 20X6 20x5 20x4 5'000 5'000 5'000 Fixed Assets (net book value) 75,600 64,800 54,000 Net Current Assets 64,400 55,200 56,000 Net Assets 140,000 120,000 110,000 Fixed Assets acquired at 19,200 18,000 - beginning of year Note: No disposal of fixed assets took place during the above periods. (ii) The total capital employed by TPI was invested in the divisions during each year as follows: Division 96 of total capital employed Timberland 30 Manufacturing 70 (iii) Depreciation is charged at 10% per annum on an accelerated basis. (iv) Depreciation is the only non-cash expense. (2) Operating cash flows were as follows: Division 20X6 20x5 Smillion Smillion Timberland 14.4 13.1 Manufacturing 20 18 (3) Each division has a target rate of return of 20% on average capital employed each year. Divisional managers are eligible to receive an annual bonus amounting to 30% ofannual salary if the target rate of return is achieved. Part A Required: (a) Compute the return on the average capital employed for each of the divisions (rounded to one decimal place of a percentage) for the years ended 31 December 20X5 and 31 December 20X6. (b) Comment on how each divisional manager might respond to the results achieved in Part A (a). Advise TPI on any potential problems that could result