QUESTION $2$

A$.$ The income statement for Division $\backslash ($ A $\backslash )$ is as follows:

Division A

Income statement for the year ended $31$ December $2018$

Division $\backslash ($ A $\backslash )$ is an investment centre that uses return on investment $($ROI$)$ for its performance measure. Management bonuses are also based on ROI. All investments are expected to earn a minimum return of $\backslash (15\backslash \%\backslash ).$ At the end of $2018,$ the division's total productive assets is RM $63$ thousand, which is a $\backslash (5\backslash \%\backslash )$ increase over the beginning balance. The total cost of capital is $\backslash (10\backslash \%\backslash ).$

Division A has an investment opportunity of RM$60,000$ that will generate additional sales of RM$16,000.$ This investment will incur additional variable cost of $\backslash (6\backslash \%\backslash )$ on sales and RM$600$ of fixed cost. By accepting this investment, Division A will increase current liabilities by RM$4,000.$

REQUIRED:

$($a$)$ Calculate ROI for Division A for the following:

$($i$)$ Without new investment

$(3$ Marks$)$

$($ii$)$ With new investment

$(2$ Marks$)$

$($b$)$ Determine whether Division A will accept the new investment if residual income $($RI$)$ is used as performance measurement. Show all workings.

$(2$ Marks$)$

$($c$)$ Determine whether Division A will accept the new investment if economic value added $($EVA$)$ is used as performance measurement. Shows all workings.

$(2$ Marks$)$

$($d$)$ Discuss ONE $(1)$ advantage of using RI as compared to ROI in evaluation of investment centre.

$(2$ Marks$)$