A company supplying capital equipment to the engineering industry is part of a large group of diverse companies. It determines its tender prices by adding a standard profit margin as a
percentage of its prime cost.
Although it is working at full capacity the group managing director considers the company's annual return on capital employed as inadequate.
You are required, as the group assistant management accountant, to provide him with the following information:
(a) Why the return-on-prime-cost (ROPC) approach to tendering would be likely to yield an inadequate return on capital employed;
(b) The steps involved in calculating a return on capital employed (ROCE) tendering rate for a particular contract;
(c) Three problems likely to be encountered in meeting a pre-set profit target on a ROCE basis