Q3

Question 3 20 Marks Performance Measure in Decentralised Organisations Fresh Produce Limited operates three divisions based on the three stores that they have across Auckland. The performance of each division is outline in the following table. Fresh Produce Limited Division 1 Division 2 Division 3 Combined Sales Variable Expenses Contgribution Margin Fixed expenses Net operating profit $ 800,000 $ $ 325,000 $ 475,000 $ $ 275,000 $ $ 200,000 $ $ 650,000 $ 275,000 $ 375,000 $ 225,000 $ 150,000 $ 350,000 $ 1,800,000 125,000 $ 725,000 225,000 $ 1,075,000 85,000 $ 585,000 140,000 $ 490,000 Divisional operating assets $ 1,500,000 $ 1,000,000 $ 750,000 $3,250,000 (You may like to make your calculation on the attached excel file (go to Question 3 worksheet) and cut and paste your answer as a picture into the space below the question) Required: Answer the following questions. a) Calculate the ROI (Return on Investment) for each of the divisions and for [4 marks] the combined operations. (You may complete table 3A in worksheet Question 3 and paste it here) b) Calculate the RI (Residual income) for each division and for the combined [4 marks] operation assuming the required rate of return is 14% (You may complete table 3B in worksheet Question 3 and paste it here) c) A new initiative costing $200,000 in additional assets promises an increase [6 marks] in sales of $100,000 and a profit of $35,000 for Division 3. Complete table 3C in worksheet question 3 and paste it here. c) Assuming you are the manager of Division 3, what would your response be [6 marks] to the proposed additional investment if your performance was 1. Based on ROI 2. Based on RI 3. Based on the organisation as a whole. Page 9 of 14