Drawing Ltd is a major producer of prefabricated beach houses. The company consists of two divisions: Bondi division and Bronte division. Bondi division’s annual performance report follows. It forms the basis of the evaluation of the division and its management.

Balance sheet as at 31 December
	Current year	Last year
Assets:
Current Assets	$800,000	$650,000
Fixed Assets	$915,000	$905,000
Total Assets	$1,715,000	$1,555,000
Liabilities:
Current Liabilities	$450,000	$800,000
Long term Liabilities	$1,265,000	$755,000
Total Liabilities	$1,715,000	$1,555,000
Performance report for the year ending 31 December
	Current year	Last year
Sales Revenue:	$850,000	$950,000
Variable Costs	$505,250	$550,250
Contribution Margin	$344,750	$399,750
Less: Controllable Fixed Expenses	$60,500	$70,200
Profit Margin Controllable by Divisional Manager	$284,250	$329,550
Less: Traceable Fixed Expenses	$135,000	$95,500
Profit Margin Traceable to Division	$149,250	$234,050
Less: Common Fixed Expenses	$50,000	$50,000
Net Profit Before Tax	$99,250	$184,050
Corporate Tax (20%)	$19,850	$36,810
Profit After Tax	$79,400	$147,240
The minimum required rate of return is 20%

The Bondi division has the opportunity to add a new product line that would require an additional investment in operating assets of $500,000. The cost and revenue characteristics of the new product line per year would be:

Sales	$1000,000
Variable cost	60% of sales
Controllable Fixed Expenses	$120,000
Traceable Fixed Expenses	$50,000

(i) Calculate the ROI (return on investment) of the Bondi division to evaluate “divisional manager’s performance” for the current year and comment on the manager's performance. Show your calculations.

(ii) Calculate the ROI of the Bondi division to evaluate “divisional performance” for the last year and comment on divisional performance. Show your calculations.

(iii) Calculate the RI (residual income) of the Bondi division to evaluate the “divisional manager’s performance” for the current year and comment on the manager's performance. Show your calculations.

(iv) Calculate the RI of the Bondi division to evaluate “divisional performance” for the last year and comment on divisional performance. Show your calculations.

(v) Calculate the ROI of the Bondi division with the new product line for the current year and recommend whether the divisional manager should undertake the new product line. Show all calculations and give one (1) reason for your recommendation.

(vi) Discuss the merits of Drawing Ltd using Economic value added (EVA) to manage organisational performance.

Answer rating: 100% (QA)

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