File Tools View Q2 . Saved - X VW Ltd produces fashion goods (clothes and accessories) and its mission statement on Division 2 is assessed on operating profits that include the transferred goods from Divi- its web site states: "VW Ltd's mission is: sion 1. In the latest financial year (2020), the net book value of assets was f5,000,000, which comprised mainly the transport vehicles. Division 2 Operating statement for the last financial year - 2020 Division 2 Operating statement for the . to provide customers with the best quality fashion goods at a competitive price, E'000 last financial year - 2020 . to operate and grow at a profitable rate through sound economic decisions, and Sales revenue 7,000 Required . to create shareholder value." Less variable costs (4.000) Variable short-run contribution 3,000 : (a) Evaluate the transfer pricing pol- Less controllable fixed costs (1.250) icy of Division 1 managers from the Controllable contribution 1,750 VW Ltd has a divisional structure. Divisions 1 and 2 are treated as investment centres. point of view of the company. Com- Non-controllable avoidable costs (100) Division 1 produces fashion goods that are transferred to Division 2 and sold externally. Divisional contribution 1.650 ment on how well the transfer pricing 60% of Division 1's goods are transferred to Division 2, with the remaining 40% being Less allocated central costs (500) policy of Division 1 fulfils VW Ltd's Divisional net profit before tax 1,150 sold externally. Division 2 is a transport and marketing division and distributes its total mission statement. output to external fashion wholesalers and retailers. Division 2 has no production costs (b) Recommend how the transfer pricing policy of VW Ltd might be improved. Evaluate or production facilities, and its sole supplier is Division 1. Division 1 managers use cost- your recommendation. plus pricing for both Division 1 external sales and Division 1 goods that are transferred to Division 2. (c) Evaluate the use of ROI as a performance measure and the basis used for ROI, for both Division 1 and 2 managers. (d) Calculate the net present value of the investment of the upgrade. Calculate ROI in Currently, VW Ltd uses return on investment (ROI) to assess divisional performance (net 2021, with and without the investment. Assume 2021 operational results will be in line profit before tax). with those in 2020. Advise Division 2 managers on whether they should go ahead with the upgrade to the computer system. At the beginning of 2022, Division 2 will have an opportunity to upgrade its computer (e) Calculate the residual income for Division 2 in 2021- with and without the planned system (hardware and software) that manages transportation Question 2 B392 F1 2022 upgrade investment. Assume 2021 operational results will be in line with those in 2020. TURN OVER 5 requirements of VW Ltd's distribution network. The initial investment will Use the analysis to discuss whether or not Division 2 will create value for VW Ltd in be f1,500,000 and cost savings of f250,000 in each year are expected to arise over the 2021. ten-year life of the upgrade. At the end of ten years, a further new investment will be End of document required. Division 2 has a cost of capital of 8%. Show desktop Screens 1-2 of 2 " Focus 170% 12 . C W 08:02 Sunny 09/06/2022