A. Performance Sdn Bhd (PSB) operates a New Car Division (that sells high performance sports cars) and a Performance Parts Division (that sells performance improvement parts for family cars). Some division financial measures for 2014 are as follows:

New Car Division Performance Parts Division

Total assets RM33,000,000 RM28,500,000 Current liabilities RM6,600,000 RM8,400,000 Operating income RM2,425,000 RM2,565,000 Required rate of return 12% 12%

REQUIRED : (a) Calculate Return on Investment (ROI) for each division using total assets as a measure of investment and operating income as a measure of income. (b) Calculate Residual Income (RI) for each divison. (c) The New Car Division manager, argues that the Performance Parts Division has loaded up on a lot of short-term debt to boost its RI. Calculate an alternative RI (based on total assets) for each division. Comment on the result.

(d) Discuss the statement that says RI is not identical to ROI, although both measures incorporate income and investment into their computations. (e) Explain ONE (1) difference between centralized and decentralized decision making.

TRANSFER PRICING Q1: Explain how transfer price can affect performance measures, companywide profits and the decision to decentralize decision making. Q2: Disadvantages of negotiated transfer price?