P and Q are two divisions of a large company. The divisions are treated as investment...

   

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P and Q are two divisions of a large company. The divisions are treated as investment centres with considerable authority for decision making decentralised to division managers. Every month they prepare an operating statement to be submitted to the Head Office. Considerable emphasis is placed on financial performance of the divisions. The monthly Operating Statement, providing indicative performance, and Balance Sheet extracts are shown below: Division Q £,000 Division P £,000 1080 Sales revenue 666 Variable costs 414 374 Contribution 666 292 Controllable overheads 114. 50 Controllable profit Apportioned central costs 405 552 242 216 Net profit before tax Divisional fixed assets: 147 26 £m £m At original cost At written down value Working capital 9.76 1.26 5.22 1.12 2.40 0.30 The company operates with a target return on capital of 15% per annum. At present the performance of each division and its management is assessed against this target using return on investment (ROI), based on assets at original cost plus working capital. The company applies straight line depreciation to fixed assets. Required: (a) Calculate the annualised ROI for divisions Pand Q from the above data in line with their current practice. Briefly compare and comment on the performance of the two divisions. (15 marks) (b) Compute the annualised ROI calculation and the annualised Residual Income (RI) value. In both cases use fixed assets based on their written down value. Comment on your (15 marks) (c) A proposal is made to purchase, immediately, a new machine which would cost £1.2m, have a life of six years with no scrap value. There are annual cash savings of £300,000 promised from the new machine. Compute and comment on the impact this would be likely observations. to have on the annual ROI and RI for each division as computed in (b) above. (10 marks) (d) Discuss the relative benefits and disadvantages of using measures such as either Return on Investment or Residual Income for managerial as well as organisational performance measurement. You should make reference to any other suitable performance measures you consider appropriate. P and Q are two divisions of a large company. The divisions are treated as investment centres with considerable authority for decision making decentralised to division managers. Every month they prepare an operating statement to be submitted to the Head Office. Considerable emphasis is placed on financial performance of the divisions. The monthly Operating Statement, providing indicative performance, and Balance Sheet extracts are shown below: Division Q £,000 Division P £,000 1080 Sales revenue 666 Variable costs 414 374 Contribution 666 292 Controllable overheads 114. 50 Controllable profit Apportioned central costs 405 552 242 216 Net profit before tax Divisional fixed assets: 147 26 £m £m At original cost At written down value Working capital 9.76 1.26 5.22 1.12 2.40 0.30 The company operates with a target return on capital of 15% per annum. At present the performance of each division and its management is assessed against this target using return on investment (ROI), based on assets at original cost plus working capital. The company applies straight line depreciation to fixed assets. Required: (a) Calculate the annualised ROI for divisions Pand Q from the above data in line with their current practice. Briefly compare and comment on the performance of the two divisions. (15 marks) (b) Compute the annualised ROI calculation and the annualised Residual Income (RI) value. In both cases use fixed assets based on their written down value. Comment on your (15 marks) (c) A proposal is made to purchase, immediately, a new machine which would cost £1.2m, have a life of six years with no scrap value. There are annual cash savings of £300,000 promised from the new machine. Compute and comment on the impact this would be likely observations. to have on the annual ROI and RI for each division as computed in (b) above. (10 marks) (d) Discuss the relative benefits and disadvantages of using measures such as either Return on Investment or Residual Income for managerial as well as organisational performance measurement. You should make reference to any other suitable performance measures you consider appropriate.

Answer rating: 100% (QA)

a Division P ROI Controllable Profit Apportioned Central Costs Fixed Assets ROI 552 405 1080 ROI 957 1080 ROI 887 Division Q ROI Controllable Profit Apportioned Central Costs Fixed Assets ROI 242 216 ... View the full answer