Wholesale Co (WC) runs a large number of wholesale stores and is increasing the number of these stores all the

time. It measures the performance of each store on the basis of a target return on investment (RO1) of 15%.

Store managers get a bonus of 10% of their salary if their store's annual ROl exceeds the target each year. Once

a store is built there is very little further capital expenditure until a full four years have passed.

WC has a store (store E) in the east of the country. Store E has historic financial data as follows over the past

four years.

Notes

Sales ($'000)

Cost of sales ($'000)

Gross profit ($'000)

1

2

Distribution costs ($'000)

Overheads

3

Net profit ($'000)

Net assets at start of year ($'000)

20X5

200

(120)

80

(20)

(47)

13

100

25

20X6

200

(130)

70

(18)

(38)

14

80

23

20X7

180

(117)

63

(15)

(38)

10

60

22

Employee numbers

(1)

(2)

(3)

Typically, WC's stores generate a 40% gross profit margin.

All of the distribution costs are variable, as each order is individually packed and sent out by courier.

The wholesale distribution market in which WC operates has been growing steadily.

20X8

170

(119)

51

(14)

(29)

8

40

20

Required

(a)

Discuss the past financial performance of store E using ROl and any other measure you

feel appropriate. Note there are a maximum of 5 marks available for calculations.

-

Using your findings from (1) discuss whether the ROI correctly reflects store E's actual

performance, reaching a conclusion about the manager's performance.

(b)

Explain how a manager in store E might have been able to manipulate the results so as to gain a

bonus more frequently.