You have recently been appointed as the management accountant attached to the head office of the company

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Question:

You have recently been appointed as the management accountant attached to the head office of the company with special responsibility of monitoring the performance of the companies within the group. Each company is treated as an investment center and every month produces an operating statement for the group headquarters. Summaries of the statements for companies X and Y which make similar products selling at similar prices for the last month showed a typical situation.

Extract from the company monthly operating statements.

X Y

GHS000 GHS000

Sales 600 370

Less variable cost 229 208

Contribution 371 162

Less controllable fixed overheads 65 28

Controllable profit 306 134

Less apportioned group costs 226 119

80 15

Company Assets GHS6.4M GHS0.9M

Estimated return on capital employed (on annual basis) 15% 20%

Although both companies are earning more than the target return on capital of 12%, there is pressure of interest rates which means this rate must be increased soon and the board is concerned at the relatively low return achieved by X.

REQUIRED

Using common size ratios and other relevant information Compare and discuss the relative performance of the two companies as shown in the summarized statement.