- 15 Marks
Question
ABC Nigeria Plc has three separate divisions – North, East and West divisions, each operating as an investment centre within the group. East Division makes and sells three products, A, B and C. All three products are sold under a brand name Alpha label, but Product A and Product B are also sold through a sales outfit as beta branded products.
Budgeted data for the year to December 31, 2024 is as follows:
Product sales
| Product A | Product B | Product C | |
|---|---|---|---|
| Units | Units | Units | |
| Alpha brand | 160,000 | 120,000 | 50,000 |
| Beta brand | 450,000 | 600,000 | – |
Selling prices
| Product A | Product B | Product C | |
|---|---|---|---|
| ₦ per unit | ₦ per unit | ₦ per unit | |
| Alpha brand | 5.00 | 6.40 | 10.00 |
| Beta brand | 3.00 | 4.00 | – |
Variable costs
| Production | Packaging | |
|---|---|---|
| ₦per unit | ₦per unit | |
| Product A: | ||
| Alpha brand | 2.40 | 0.60 |
| Beta brand | 2.40 | 0.20 |
| Product B: | ||
| Alpha brand | 3.20 | 0.80 |
| Beta brand | 3.20 | 0.40 |
| Product C: | ||
| Alpha brand | 5.00 | 1.00 |
Budgeted marketing expenditure is ₦300,000 for the year, and other budgeted expenditure for other fixed costs is ₦700,000. The average capital employed in East Division in Year 2024 is expected to be ₦1,000,000 and each division’s cost of capital is 12%.
Required
a. Calculate the budgeted Return on investment for East Division for the year to December 31, 2024. (5 Marks)
b. Calculate the budgeted residual income for East Division for the year to December 31, 2024. (5 Marks)
c. What are the advantages of return on investment measure over the residual income approach of divisional performance appraisal. (5 Marks)
(Total 15 Marks)
Answer
ABC NIGERIA PLC
| Unit Sales Price | Unit Variable Cost | Contribution | Units | Total Contribution | |
|---|---|---|---|---|---|
| Product A | |||||
| Alpha brand | 5.00 | 3.00 | 2.00 | 160,000 | 320,000 |
| Beta brand | 3.00 | 2.60 | 0.40 | 450,000 | 180,000 |
| Product B | |||||
| Alpha brand | 6.40 | 4.00 | 2.40 | 120,000 | 288,000 |
| Beta brand | 4.00 | 3.60 | 0.40 | 600,000 | 240,000 |
| Product C | |||||
| Alpha brand | 10.00 | 6.00 | 4.00 | 50,000 | 200,000 |
| Total contribution | 1,228,000 |
| Fixed Cost | |
|---|---|
| Marketing Cost | 300,000 |
| Other fixed costs | 700,000 |
| 1,000,000 | |
| Net profit | 228,000 |
a. ROI
- 228,000 x 100 = 22.80% 1,000,000 1
b. Residual Income Net Profit N228,000 Imputed (notional) Cost 12% of N1,000,000 120,000 Residual Income N108,000
c. Advantages of ROI over Residual Income approach.
ROI relates the Profit to the Capital employed
. It is a percentage measure.
It is a tool for comparison.
It is easily understood.
It focuses on capital employed.
- Topic: Divisional Performance Measurement
- Series: MAY 2025
- Uploader: Samuel Duah