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Find Related Questions by Tags, levels, etc.
Ken and Yon are two divisions of a large company that operate in similar markets. The divisions are treated as investment centres, and every month each division prepares an operating statement and submits it to the parent company. Operating statements for the two divisions for October are stated below:
| Operating Statements for October | Ken (GH¢000) | Yon (GH¢000) |
|---|---|---|
| Sales revenue | 900 | 555 |
| Variable costs | 345 | 312 |
| Controllable fixed costs (includes depreciation on division assets) | 433 | 222 |
| Uncontrollable apportioned central costs | 15 | 5 |
| Divisional net assets for the year | 9,760 | 1,260 |
The company currently has a target return on capital of 12% per annum. However, the company believes its cost of capital is likely to rise and it is considering increasing the target return on capital. Currently, the performance of each division and the divisional management are assessed primarily based on Return on Investment (ROI) using controllable profit.
Required:
i) Calculate the annualised Return on Investment (ROI) for divisions Ken and Yon, and discuss their relative performances. (6 marks)
ii) Calculate the annualised Residual Income (RI) using controllable profit for divisions Ken and Yon, and evaluate their division’s performances. (6 marks)
iii) Using appropriate ratios, evaluate the efficiency of the two divisions. (3 marks)
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The Bottle Labelling Division of Crush Drink Ltd currently has capital employed of GH¢100,000 and earns an annual profit after depreciation of GH¢18,000. The divisional manager is considering an investment of GH¢10,000 in an asset which will have a ten-year life with no residual value and will earn a constant annual profit after depreciation of GH¢1,600. The cost of capital is 15%.
Required:
Calculate the following and comment on the results.
i) The return on divisional investment, before and after the new investment
ii) The divisional residual income before and after the new investment
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Find Related Questions by Tags, levels, etc.
Super Express Transport Company runs a fleet of buses on the Accra-Sunyani route, which is considered a business unit.
The following is an extract from the final accounts of the company as at the last operating year:
One of the buses, bought three years ago at the cost of GH¢150,000, was not performing efficiently because it got involved in an accident just a year after it was purchased. Although the damage was minor, the Operations Manager suggested that the bus be scrapped, in spite of the fact that it earned a profit of GH¢6,000 in the year. Depreciation is at the rate of 20% p.a. on a straight-line basis.
Required:
Evaluate the effect of this proposal on the performance of the business unit, if Return on Investment (ROI) is used to measure the performance of subunits. (5 marks)
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b) Peah is a divisional manager of Monrovia Ltd. He is paid a bonus of 5% on the division’s residual income after charging the bonus. The division is currently considering an additional investment of GH¢200,000 with 10 years useful life but nil residual value. The investment is expected to yield a profit after depreciation of GH¢51,600. This will augment the existing capital employed of GH¢1,050,000 that currently offers GH¢264,400 profit after depreciation annually. The company’s policy is to accept investment projects that provide a return of at least 22%.
Required: i) Calculate the Return on Investment and Residual Incomes of the division before considering the new investment. (2 ½ marks)
ii) Advise the division on whether the new investment should be taken or not. (2 ½ marks)
iii) What will be the percentage change in the bonus of Peah if the new investment is added to the division’s existing operations? (3 marks)
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SAKAMA Ghana Ltd uses the Accounting Rate of Return (ARR) as the basis of evaluating projects for investment of its scarce financial resources. It uses its predetermined expected return on capital as the basis for the choice of investment projects. The company’s Finance team has provided the information below regarding various projects and their initial investments and net cash flows. The hurdle rate or target Accounting Rate of Return for SAKAMA Ghana Ltd is 25%.
Required:
i) Calculate the Accounting Rate of Return for each project (Average Investment basis). (7 marks)
ii) Using the target return of 25%, advise SAKAMA Ghana Ltd which projects should be undertaken. (3 marks)
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Find Related Questions by Tags, levels, etc.
Find Related Questions by Tags, levels, etc.
Ken and Yon are two divisions of a large company that operate in similar markets. The divisions are treated as investment centres, and every month each division prepares an operating statement and submits it to the parent company. Operating statements for the two divisions for October are stated below:
| Operating Statements for October | Ken (GH¢000) | Yon (GH¢000) |
|---|---|---|
| Sales revenue | 900 | 555 |
| Variable costs | 345 | 312 |
| Controllable fixed costs (includes depreciation on division assets) | 433 | 222 |
| Uncontrollable apportioned central costs | 15 | 5 |
| Divisional net assets for the year | 9,760 | 1,260 |
The company currently has a target return on capital of 12% per annum. However, the company believes its cost of capital is likely to rise and it is considering increasing the target return on capital. Currently, the performance of each division and the divisional management are assessed primarily based on Return on Investment (ROI) using controllable profit.
Required:
i) Calculate the annualised Return on Investment (ROI) for divisions Ken and Yon, and discuss their relative performances. (6 marks)
ii) Calculate the annualised Residual Income (RI) using controllable profit for divisions Ken and Yon, and evaluate their division’s performances. (6 marks)
iii) Using appropriate ratios, evaluate the efficiency of the two divisions. (3 marks)
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The Bottle Labelling Division of Crush Drink Ltd currently has capital employed of GH¢100,000 and earns an annual profit after depreciation of GH¢18,000. The divisional manager is considering an investment of GH¢10,000 in an asset which will have a ten-year life with no residual value and will earn a constant annual profit after depreciation of GH¢1,600. The cost of capital is 15%.
Required:
Calculate the following and comment on the results.
i) The return on divisional investment, before and after the new investment
ii) The divisional residual income before and after the new investment
Find Related Questions by Tags, levels, etc.
Find Related Questions by Tags, levels, etc.
Super Express Transport Company runs a fleet of buses on the Accra-Sunyani route, which is considered a business unit.
The following is an extract from the final accounts of the company as at the last operating year:
One of the buses, bought three years ago at the cost of GH¢150,000, was not performing efficiently because it got involved in an accident just a year after it was purchased. Although the damage was minor, the Operations Manager suggested that the bus be scrapped, in spite of the fact that it earned a profit of GH¢6,000 in the year. Depreciation is at the rate of 20% p.a. on a straight-line basis.
Required:
Evaluate the effect of this proposal on the performance of the business unit, if Return on Investment (ROI) is used to measure the performance of subunits. (5 marks)
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b) Peah is a divisional manager of Monrovia Ltd. He is paid a bonus of 5% on the division’s residual income after charging the bonus. The division is currently considering an additional investment of GH¢200,000 with 10 years useful life but nil residual value. The investment is expected to yield a profit after depreciation of GH¢51,600. This will augment the existing capital employed of GH¢1,050,000 that currently offers GH¢264,400 profit after depreciation annually. The company’s policy is to accept investment projects that provide a return of at least 22%.
Required: i) Calculate the Return on Investment and Residual Incomes of the division before considering the new investment. (2 ½ marks)
ii) Advise the division on whether the new investment should be taken or not. (2 ½ marks)
iii) What will be the percentage change in the bonus of Peah if the new investment is added to the division’s existing operations? (3 marks)
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SAKAMA Ghana Ltd uses the Accounting Rate of Return (ARR) as the basis of evaluating projects for investment of its scarce financial resources. It uses its predetermined expected return on capital as the basis for the choice of investment projects. The company’s Finance team has provided the information below regarding various projects and their initial investments and net cash flows. The hurdle rate or target Accounting Rate of Return for SAKAMA Ghana Ltd is 25%.
Required:
i) Calculate the Accounting Rate of Return for each project (Average Investment basis). (7 marks)
ii) Using the target return of 25%, advise SAKAMA Ghana Ltd which projects should be undertaken. (3 marks)
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