ABC Sdn Bhd is a large company, manufacturing and selling advanced technological medical devices. The company...
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ABC Sdn Bhd is a large company, manufacturing and selling advanced technological medical devices. The company has two divisions and the divisional structure is divided based on its product line, namely Division X, for product line X and Division Y, for product line Y. Both the divisions operate separately as an investment centre. The two divisions also have full control and responsibility for their own assets and liabilities. The following are the extracted information from the latest financial year end for the two divisions: Financial information: Non-current assets Current assets Trade payables Sales revenue Controllable profit Apportioned central costs Net profit Other financial information: Investment in equipment during the year Division X RM'000 14,640 3,720 4,440 21,750 3,968 1,898 2,070 Division Y RM'000 22,470 4,890 2,100 13,050 2,955 1,026 1,929 10,200² Note 1: No investment has been undertaken during the year, even though there is a need to upgrade its capital investment to more advanced technology to remain competitive in the market. Note 2: This investment undertaken during the year, will increase the division's productivity by 9% per annum. The performance of the divisional managers is measured based on the return on investment (ROI) achieved by their division for the year, with a minimum target of 10% ROI. The bonus payment structure for ABC Sdn Bhd, ranges from 1% to a maximum of 20% of the annual salary. For every whole percentage above the minimum ROI, a bonus equivalent to 1% of the annual salary will be awarded to the divisional manager. Each divisional manager is paid an average salary of RM180,000 per annum. During the recent management meeting, the new sales and marketing director of ABC Sdn Bhd has commented "It is not fair to use ROI to measure the performance of our divisional managers. Using ROI, we are paying more bonuses to Division X's manager. This is so unfair to Division Y's manager. We should be using residual income in evaluating their performance." Required: Do you agree with the comments made by the new sales and marketing director? Critically discuss your view on the comments made. Relevant computation with brief justification on the figures used, should be included to support your discussion. ABC Sdn Bhd is a large company, manufacturing and selling advanced technological medical devices. The company has two divisions and the divisional structure is divided based on its product line, namely Division X, for product line X and Division Y, for product line Y. Both the divisions operate separately as an investment centre. The two divisions also have full control and responsibility for their own assets and liabilities. The following are the extracted information from the latest financial year end for the two divisions: Financial information: Non-current assets Current assets Trade payables Sales revenue Controllable profit Apportioned central costs Net profit Other financial information: Investment in equipment during the year Division X RM'000 14,640 3,720 4,440 21,750 3,968 1,898 2,070 Division Y RM'000 22,470 4,890 2,100 13,050 2,955 1,026 1,929 10,200² Note 1: No investment has been undertaken during the year, even though there is a need to upgrade its capital investment to more advanced technology to remain competitive in the market. Note 2: This investment undertaken during the year, will increase the division's productivity by 9% per annum. The performance of the divisional managers is measured based on the return on investment (ROI) achieved by their division for the year, with a minimum target of 10% ROI. The bonus payment structure for ABC Sdn Bhd, ranges from 1% to a maximum of 20% of the annual salary. For every whole percentage above the minimum ROI, a bonus equivalent to 1% of the annual salary will be awarded to the divisional manager. Each divisional manager is paid an average salary of RM180,000 per annum. During the recent management meeting, the new sales and marketing director of ABC Sdn Bhd has commented "It is not fair to use ROI to measure the performance of our divisional managers. Using ROI, we are paying more bonuses to Division X's manager. This is so unfair to Division Y's manager. We should be using residual income in evaluating their performance." Required: Do you agree with the comments made by the new sales and marketing director? Critically discuss your view on the comments made. Relevant computation with brief justification on the figures used, should be included to support your discussion.
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Related Book For
Accounting concepts and applications
ISBN: 978-0538745482
11th Edition
Authors: Albrecht Stice, Stice Swain
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