MA – L2 – Q60 – Performance Analysis

Calculate the budgeted ROI for North Sector for the year to 31 December Year 7.

Question

PrimeCorp has several separate divisions, each operating as an investment centre within the group. North Sector makes and sells three products, A, B, and C. All three products are sold under the Apex brand label, but Product A and Product B are also sold through a supermarket group as unbranded products. Budgeted data for the year to 31 December Year 7 is as follows:

Product sales

	Product A	Product B	Product C
	units	units	units
Apex brand	160,000	120,000	50,000
Unbranded	450,000	600,000

Selling prices

	Product A	Product B	Product C
	GH¢ per unit	GH¢ per unit	GH¢ per unit
Apex brand	2.50	3.20	5.00
Unbranded	1.50	2.00

Variable costs

	Production	Packaging
	GH¢ per unit	GH¢ per unit
Product A:
Apex brand	1.20	0.30
Unbranded	1.20	0.10
Product B:
Apex brand	1.60	0.40
Unbranded	1.60	0.20
Product C:
Apex brand	2.50	0.50

Budgeted marketing expenditure is GH¢180,000 for the year, and other budgeted expenditure for other fixed costs is GH¢375,000. The average capital employed in North Sector in Year 7 is expected to be GH¢400,000 and the division’s cost of capital is 10%.

Required:
(a) Calculate the budgeted ROI for North Sector for the year to 31 December Year 7.

b) Calculate the budgeted residual income for North Sector for the year to 31 December Year 7.

Answer

(a)

	Sales price	Variable cost	Contribution per unit	Sales	Total contribution
	GH¢ per unit	GH¢ per unit	GH¢ per unit	units	GH¢
Product A:
Apex brand	2.50	1.50	1.00	160,000	160,000
Unbranded	1.50	1.30	0.20	450,000	90,000
Product B:
Apex brand	3.20	2.00	1.20	120,000	144,000
Unbranded	2.00	1.80	0.20	600,000	120,000
Product C:
Apex brand	5.00	3.00	2.00	50,000	100,000
					614,000

	GH¢
Marketing costs	180,000
Other fixed costs	375,000
	555,000
	59,000

(a) ROI = 59,000 / 400,000 = 14.75%.

(B)

ales price	Variable cost	Contribution per unit	Sales	Total contribution
	GH¢ per unit	GH¢ per unit	GH¢ per unit	units	GH¢
Product A:
Apex brand	2.50	1.50	1.00	160,000	160,000
Unbranded	1.50	1.30	0.20	450,000	90,000
Product B:
Apex brand	3.20	2.00	1.20	120,000	144,000
Unbranded	2.00	1.80	0.20	600,000	120,000
Product C:
Apex brand	5.00	3.00	2.00	50,000	100,000
					614,000

	GH¢
Marketing costs	180,000
Other fixed costs	375,000
	555,000
	59,000
Notional interest: 10% × GH¢400,000	(40,000)
Residual income	19,000

(b) Residual income = GH¢19,000.

Tags: Divisional performance, Financial metrics, Investment centre, Performance Analysis, ROI
Level: Level 2

Topic: Performance Analysis

Uploader: Salamat Hamid