Subject: PERFORMANCE MANAGEMENT

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PM – Nov 2024 – L2 – Q7b – Divisional Performance Measurement

Evaluating division performance using ROI and residual income methods with adjusted cost of capital.

Question

Ngerige and Sons Limited has four operating divisions spread across four cities in Nigeria: Lagos, Kano, Gombe, and Enugu. These divisions are treated as investment centres for performance reporting purposes. The following information is available:

Particulars	Lagos	Kano	Gombe	Enugu
Divisional Investment (N)	10,000,000	4,000,000	3,000,000	7,000,000
Divisional Sales (N)	53,000,000	23,000,000	24,600,000	29,400,000
Divisional Variable Costs (N)	50,000,000	22,000,000	23,400,000	27,400,000
Specific Fixed Costs (N)	1,500,000	750,000	600,000	800,000

The company’s annual general fixed cost is N1,300,000, apportioned to divisions based on sales. The cost of capital for Ngerige and Sons Limited is 7.5%. Ignore taxation.

Required:

i. Evaluate the performance of the divisions using the following methods:

ROI method. (3 Marks)
Residual Income Method. (3 Marks)

ii. Re-evaluate the residual income situation for the company given an adjusted cost of capital of 10%. (3 Marks)

Answer

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Tags: Cost of Capital, Division Performance, Investment Centres, Profitability Ratios, Residual Income, ROI
Level: Level 2

Topic: Divisional Performance Measurement

PM – Nov 2024 – L2 – Q7a – Divisional Performance Measurement

Definitions of Responsibility Accounting, Investment Centre, Return on Investment (ROI), and Residual Income.

Question

Define the following concepts:

i. Responsibility accounting
ii. An investment centre
iii. Return on Investment (ROI)
iv. Residual income

Answer

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Tags: Investment Centre, Performance Measurement, Residual Income, Responsibility Accounting, ROI
Level: Level 2

Topic: Divisional Performance Measurement

PM – Nov 2024 – L2 – Q6 – Divisional Performance Measurement

Comparative analysis of Owerri and Isiekenesi event centers based on financial performance metrics

Question

Omegboje and company is a medium-scale outfit that specializes in the rental business in Owerri and Isiekenesi towns. The company operates a large event center in each city, supplying chairs, tables, and canopies for both outdoor and some indoor events.

Each event center manager has some independence in operations and earns a performance bonus of 10% of sales if they achieve more than the standard return on capital employed (ROCE) of 50%.

The following financial data is available for the two centers for the years ending December 31, 2020, and 2019:

Additional Information:

Revenue is derived from rentals and ancillary services.
Both centers have a cost of capital of 15%.
Ignore taxation and inflation.

Required:

a. Discuss the relative performance of the two centers based on: i. Return on Capital Employed (ROCE) ii. Residual Income iii. Profit Margin iv. Current Ratio v. Quick Ratio vi. Gearing Ratio vii. Interest Cover
(7 Marks)

b. Compute the performance bonus for the centers (if any), showing your workings.
(4 Marks)

c. Briefly outline the role of a Management Accountant in project management.
(4 Marks)

Answer

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Tags: Current Ratio, Gearing Ratio, Interest Cover, Liquidity Ratios, Profit margin, Quick Ratio, Residual Income, ROCE
Level: Level 2

Topic: Divisional Performance Measurement

PM – Nov 2024 – L2 – Q1 – Decision-Making Techniques

Optimization of Oshimiri Nigeria Limited's production plan to maximize profits under resource constraints using linear programming.

Question

Oshimiri Nigeria Limited, a company based in Aba, produces two grades of industrial vanish. The selling price and associated unit variable costs for vanish Grade A and Grade B are shown below:

Particulars	Grade A	Grade B
Selling Price	N2,100	N1,500
Material X (N240/kg)	N480	N240
Skilled Labour (N144/hr)	N720	N288
Unskilled Labour (N60/hr)	N120	N180
Variable Overhead (N84/machine hr)	N168	N336

The fixed overhead costs are N2,600,000 per month. The company plans to maximize profits.

The availability of resources for the following month is as follows:

Material X: 25,000 Kg
Skilled Labour: 48,000 hours
Unskilled Labour: 39,000 hours
Machine hours: 50,000 hours

Required:

a. Identify the objective function and the constraints of the model to be used in determining the optimum production plan for the following month. (5 Marks)

b. Determine the optimum production plan for the month and the associated profit. (5 Marks)

c. Explain the concept and significance of dual prices and slack variables in the context of the model used by the company in this scenario. (4 Marks)

d. Calculate the dual prices for constraints identified in this scenario. (10 Marks)

e. Suggest ways in which the management can overcome the capacity constraints identified above during the month and the cost implications. (6 Marks)

Answer

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Tags: Capacity Constraints, Constraints, Dual Prices, Linear Programming, Objective Function, Production Plan, Slack Variables
Level: Level 2

Topic: Decision-making techniques

PM – May 2015 – L2 – SB – Q7 – Environmental and Social Performance Management

Discuss the concept of globalisation, its impact on management information systems, and arguments against its influence on management performance

Question

The use of internet has made the entire universe a global village. Managers can comfortably sit in their offices connected to the internet and the world wide web to obtain all necessary information for their business needs.

Required: a. Discuss the concept of globalisation and how management information systems have enhanced effective management performance. (10 Marks)
b. What arguments will you advance against globalisation as it relates to management performance? (5 Marks)

Answer

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Tags: Globalisation, Internet Usage, Management Performance, MIS
Level: Level 2

Topic: Environmental and Social Performance Management
Series: MAY 2015

PM – May 2015 – L2 – SB – Q6 – Costing Systems and Techniques-

Determine the most profitable product mix for Markus Limited, and prepare a profitability statement for the optimal product mix.

Question

Markus Limited manufactures three products and operates a marginal costing system.

The following information has been extracted from the company’s records:

Products	X	Y	Z
Units budgeted to be produced and sold	3,600	6,000	3,400
Selling Price (₦)	120	110	100
Requirement per Unit:
Direct Material (kg)	5	3	4
Direct Labour (Hours)	4	3	2
Direct Labour Hour rate (₦)	4	4	4
Direct Material Cost per Kg (₦)	8	8	8
Variable Overheads (₦)	14	26	16
Fixed Overheads (₦)	20	20	20
Maximum possible sales (units)	8,000	10,000	3,000

All the three products are produced from the same direct material using the same types of machine and labour. Direct labour, which is the key factor, is limited to 37,200 hours.

Required: a. Determine the most profitable product mix. (6 Marks)
b. Prepare a statement of profitability for the product mix. (9 Marks)

Answer

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Tags: Contribution analysis, Marginal Costing, Product Mix, Profitability
Level: Level 2

Topic: Costing Systems and Techniques
Series: MAY 2015

PM – May 2015 – L2 – SB – Q5 – Balanced Scorecard

Evaluate the use of the Balanced Scorecard and analyze investment decisions for Carossi Limited using ROI and RI.

Question

CAROSSI Limited makes quality wooden products such as tables, chairs, benches, and doors. Historically, the company has used mainly financial performance measures to assess the performance of the company as a whole. The company’s Chief Executive Officer has just been informed of the ‘Balanced Scorecard Approach’ and is eager to learn more.

CAROSSI Limited has two Divisions X and Y, each with its own cost and revenue streams. Each Division is managed by a divisional manager who has the power to make all investment decisions within the Division. The cost of capital for both Divisions is 15 percent. Historically, investment decisions have been made by calculating the Return on Investment (ROI) of any opportunities, and presently, the return on investment of each Division is 18 percent.

A recently appointed manager for Division X strongly feels that using Residual Income (RI) to make investment decisions would result in better ‘goal congruence’ throughout the organisation.

Investment Details for Each Division:

	Division X	Division Y
Capital required for investment (₦m)	88.2	46.0
Revenue generated from investment (₦m)	46.4	28.1
Net profit margin (%)	30	35

The company is seeking to maximise shareholders’ wealth.

Required: a. Describe the Balanced Scorecard Approach to performance measurement. (8 Marks)
b. Determine both the return on investment and residual income of the new investment for each of the two divisions. Comment on these results and take into consideration the manager’s views about residual income. (7 Marks)

Answer

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Tags: Balanced Scorecard, Goal Congruence, Investment Appraisal, Residual Income, ROI
Level: Level 2

Topic: Balanced Scorecard
Series: MAY 2015

PM – May 2015 – L2 – SB – Q4 – Costing Systems and Techniques

Analyze the pricing policy and budget position for Badegy Limited, considering competitor price changes and cost inflation.

Question

BADEGY Limited is a medium-sized company. The company is in the process of deciding its pricing policy for the next period.

The following information is available from its records:

Previous Period:

Revenue: ₦13,000,000
Units Sold: 100,000 at ₦130
Costs: ₦10,000,000
Profit: ₦3,000,000

Current Period:

Revenue: ₦13,780,000
Units Sold: 106,000 at ₦130
Costs: ₦10,774,000
Profit: ₦3,006,000

It was discovered that between the previous and current periods, there was a 4% general cost inflation, and it is forecast that costs will rise further by 6% in the next period. As a matter of policy, the company did not increase the selling price in the current period, although competitors raised their prices by 4% to allow for the increased costs.

A survey by a team of management consultants found that the demand for the product is elastic with an estimated price elasticity of demand of 1.5. This means that volume falls by 1.5 times the rate of real price increase. Various options are to be considered by the Board.

Required: a. Show the budgeted position of the company if it maintains the ₦130 selling price for the next period when it is expected that competitors will increase their prices by 6%. (15 Marks)
b. What would the budgeted position be if the company also raises its price by 6%? (5 Marks)

Answer

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Tags: Budget Position, Competitor Pricing, Cost Analysis, Demand Elasticity, Pricing Policy
Level: Level 2

Topic: Costing Systems and Techniques
Series: MAY 2015

FM – May 2015 – L2 – SB – Q3 – Cost-Volume-Profit (CVP) Analysis

Evaluate Pakex's investment proposal using Residual Income and ROCE, including alternative proposal analysis for decision-making.

Question

Pakex is a division of an automobile group that has five years remaining on a leased premises in which it sells self-assembled motorcycles. The management is proposing an investment of ₦48 million on immediate improvements to the interior of the premises in order to stimulate sales by creating a more effective selling environment. The following information is available:

(i) The expected increase in revenue following the improvements is ₦40 million per annum. The average contribution to sales ratio is expected to be 40%.

(ii) The cost of capital is 16% and the division has a target Return on Capital Employed of 20% based on the net book value of the investment at the beginning of the year.

(iii) At the end of the five-year period, the premises improvements will have a NIL residual value.

(iv) The management staff turnover at Pakex division is high. The division’s investment decisions and management performance measurement are currently based on the figures for the first year of the proposal.

In addition to the above information, there is an alternative proposal that suggests a forecast of the increase in revenue per annum from the premises improvements as follows:

Year	1	2	3	4	5
Increase in Revenue	56	40	40	24	16

All other factors are expected to remain the same.

Required: a. Prepare a summary of the statement of the management’s investment proposal for years 1 to 5 showing Residual Income and Return on Capital Employed for each year using the straight-line depreciation method. (10 Marks)
b. Comment on the use of the figures from the Statement in (a) above as a decision-making and management performance measure. (4 Marks)
c. Calculate the Residual Income and Return on Capital Employed for year 1 using the alternative proposal. (6 Marks)

Answer

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Tags: Investment Appraisal, Management Performance, Residual Income, ROCE, Straight Line Depreciation
Level: Level 2

Topic: Cost-Volume-Profit (CVP) Analysis
Series: MAY 2015

FM – May 2015 – L2 – SB – Q2 – Introduction to Performance Management

Prepare profitability and cash flow statements, and compute liquidity and gearing ratios for Ozoigbondu Nigeria Limited.

Question

Ozoigbondu Nigeria Limited is a company that is into buying and selling of plastic containers. The company is financed by a capital of ₦15 million inclusive of reserves in a mix of 30% and 70% of debt and equity respectively.

The Company has been in trading business for the past six years and has consistently adhered to its corporate policy on sales, purchases, and inventory management.

The company’s policy on sales is to ensure that sales are collected as follows: (i) Cash sales is 40% of the monthly sales. (ii) The balance of the month’s sales is to be collected in the month following sales.

The policy on purchases is in agreement with the supplier’s policy which is to pay for all supplies in the month following. The company’s stock policy is to reserve 30% of the month’s purchases as closing inventory.

The following information is available for the five years 2010 to 2014:

	2010	2011	2012	2013	2014
Monthly Sales	3,400,000	3,600,000	4,200,000	4,800,000	7,200,000
Monthly Purchases	2,000,000	2,400,000	2,800,000	3,200,000	4,800,000
Monthly Salaries	350,000	350,000	430,000	430,000	480,000
Monthly Rent	100,000	100,000	100,000	100,000	100,000
Monthly Cash Expenses	200,000	220,000	240,000	280,000	360,000

Additional Information: (i) The company purchased a motor vehicle in July 2013 which was paid for in September 2013. The cost of the motor vehicle was ₦5,000,000.
(ii) Annual depreciation for the motor vehicle is 20%.
(iii) The Cash Balance as at 31st December 2011 was ₦4,000,000.
(iv) The company’s salaries, rent, and expenses were paid in the month they were due.

Required: a. Prepare a Profitability Statement for 2012, 2013, and 2014. (10 Marks)
b. Prepare a Cash Flow Statement for 2012, 2013, and 2014. (7 Marks)
c. Determine and comment on the liquidity ratio (current ratio) for 2014. (2 Marks)
d. Compute the gearing ratio. (1 Mark)

Answer

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Tags: Cash Flow, Financial Ratios, Financial Statement Analysis, Gearing, Liquidity, Profit Analysis
Level: Level 2

Topic: Introduction to Performance Management
Series: MAY 2015

PM – May 2018 – L2 – Q5 – Strategic Management Accounting

Determine the optimal production plan for Classic Wears Plc. and calculate the total profit.

Question

Classic Wears Plc. manufactures three unique jeans wears for which the maximum
revenue for the coming year is estimated as follows:

summarised unit cost data are as follows:

The products are processed on sewing machines housed in a building of three blocks.
Block A contains type I machine which has an estimated maximum of 19,600 machine
hours available in the forthcoming year with fixed overhead cost of N980,000 per
annum.
Block B contains type II machine of which 10,000 machine hours are estimated in the
forthcoming year with a fixed overhead cost of N750,000 per annum.
Block C also contains type II machine which also has an estimate of 8,000 machine
hours available in the forthcoming year. The fixed overhead cost of N370,000 is
estimated per annum for Block C.
The required machine hours for one unit of output for each Jeans on each type of
machine are as follows:

You are required to:
a. Determine the optimal production plan which Classic Wears Limited should
adopt. (12 Marks)
b. Calculate the total profit that would be made, if the production plan in (a)
above is adopted. (3 Marks)

Answer

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Tags: Contribution analysis, Jeans Production, Machine Hours, Optimal production, Profit Calculation
Level: Level 2

Topic: Cost-Volume-Profit (CVP) Analysis, Linear Programming
Series: MAY 2018

PM – May 2019 – L2 – Q6 – Strategic Management Accounting

Discusses the essential qualities needed for management accounting information to be useful for decision-making.

Question

“The purpose of management accounting is to provide relevant and reliable information so that managers can make well-informed decisions. The value of management accounting, therefore, depends on the quality of the information provided and whether this information helps managers to make better decisions.” Therefore, before management accounting information can be useful to managers, it must possess some qualities.

Required:
Discuss the essential qualities of good management accounting information.

Answer

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Tags: Accounting principles, Decision Making, Information Quality, Management Accounting
Level: Level 2

Topic: Strategic Management Accounting
Series: MAY 2019

PM – May 2019 – L2 – Q5 – Transfer Pricing

Profitability analysis for two divisions, including transfer pricing and external supplier impacts.

Question

TK is a company that produces toy television sets targeting children of the elite. The company has two divisions, Division S and Division B. Division S manufactures components for the televisions and sells components to Division B and to external customers. Division B uses five of the components in each of the toy television sets that it manufactures and sells television sets directly to external customers.

Division S
Budgeted variable manufacturing cost per component (N):

Direct material: 140
Direct labour: 180
Variable overhead: 120

Additional Information:

Fixed costs: N5,600,000
Production capacity: 175,000 components
External demand: 150,000 components
Potential demand from Division B: 80,000 components
Anticipated external market price for a component: N500

Division B

Sales price: N4,500
Budgeted variable manufacturing cost per television (N):
- Direct material: 400
- Direct labour: 620
- Variable overhead: 160

Each toy television set produced needs five components. Fixed costs are budgeted to be N14,600,000 for next year. Annual sales of the toy television sets are expected to be 16,000 units.

Transfer Pricing Policy:

Transfer prices are set at opportunity cost.
Division S must satisfy the demand of Division B before selling components externally.
Division B is allowed to purchase components from Division S or from external suppliers.

Required:
a. Assuming that Division B buys all the components it requires from Division S:
Prepare a profit statement for each division detailing sales and costs, showing external sales and internal company transfers separately where appropriate. (6 Marks)

b. A specialist external supplier has approached Division B and offered to supply 80,000 components at a price of N420 each. The components fulfil the same function as those manufactured by Division S. The manager of Division B has accepted the offer and agreed to buy all the components it requires from this supplier:
i. Produce a revised profit statement for each division and for the total TK company.
ii. Division S has just received an enquiry from a new customer for the production of 25,000 components. The manager of Division S requires a total profit for the year for the division of N4,500,000.

Calculate the minimum price per component to sell the 25,000 components to the new customer that would enable the manager of Division S to meet the profit target. (4 Marks)

Note: This order will have no effect on the divisional fixed costs and no impact on the 150,000 components Division S sells to its existing external customers at N500 per component. Division B will continue to purchase the 80,000 components it requires from the specialist external supplier.

Answer

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Tags: Cost Analysis, Divisional Performance, Opportunity Cost, Profit Calculation, Transfer Pricing
Level: Level 2

Topic: Transfer Pricing
Series: MAY 2019

PM – May 2018 – L2 – Q4 – Performance Measurement Systems

Discuss the responsibilities and skills required of a Project Manager for implementing a new computer system at ABC Limited.

Question

ABC Limited, a medium-sized family-owned company in Lagos, is considering upgrading its computer systems to better support management decision-making and meet market demands. The directors plan to appoint a temporary Project Manager to lead the systems development project.
a) Identify and describe the responsibilities of the Project Manager within ABC Limited. (10 Marks)
b) Discuss the skills that a Project Manager would require to successfully implement a major project involving the design and installation of the new computer system within ABC Limited. (10 Marks)

Answer

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Tags: Information Systems, Leadership, Organizational Change, Project Management
Level: Level 2

Topic: Information Systems
Series: MAY 2018

PM – May 2018 – L2 – Q3b – Cost-Volume-Profit (CVP) Analysis

Calculate the relevant cost for a special contract and determine if it should be accepted.

Question

Deban Construction Limited is deciding whether or not to proceed with a one-off special contract for which it would receive a one-off payment of N2,000,000. Details of relevant costs are provided for labor, materials, storage, and overheads. Calculate the relevant cost of the contract and advise whether the contract should be accepted or not on financial grounds.

Answer

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Tags: Incremental Analysis, Labour Costs, Material Costs, Overheads, Relevant Costs, Special Contract
Level: Level 2

Topic: Decision making techniques
Series: MAY 2018

PM – May 2018 – L2 – Q3a – Cost-Volume-Profit (CVP) Analysis

Explain the different concepts of relevant costs in the context of decision-making.

Question

In the context of relevant costs, explain the following:
i. Incremental costs;
ii. Differential costs;
iii. Avoidable and unavoidable costs;
iv. Committed costs;
v. Sunk costs; and
vi. Opportunity costs.

Answer

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Tags: Avoidable Costs, Differential Costs, Incremental Costs, Opportunity Costs, Relevant Costs, Sunk Costs
Level: Level 2

Topic: Decision-making techniques
Series: MAY 2018

PM – May 2018 – L2 – Q2 – Standard Costing and Variance Analysis

Calculate sales variances and discuss their significance in standard costing.

Question

Nwokocha and Sons Bakery Limited uses absorption costing technique in its
accounting system. The company produces and sells three bakery products, namely
four corner loaf (F), round corner loaf (R) and executive loaf (E) which are
substitutes for each other. The following standard selling prices and cost data
relate to these three products:

Annual budgeted fixed production overhead was N3,840,000. The company policy
is that overhead will be absorbed on a machine hour basis. The standard machine
hour for each product and the monthly budgeted level of production and sales for
each product are as follows;

Actual volumes and selling prices for the three products in a particular month are
as follows:

a. Calculate the following variances for overall sales for the particular month:
i. Sales price variance; (2 Marks)
ii. Sales volume profit variance; (2 Marks)
iii. Sales mix profit variance; and (3 Marks)
iv. Sales quantity profit variance. (3 Marks)
b. Determine the monthly budgeted profit for the company. (6 Marks)
c. Discuss the significance of mix variances in a standard costing system?
(4 Marks)

Answer

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Tags: Absorption Costing, Bakery, Performance Evaluation, Sales Variances
Level: Level 2

Topic: Variance Analysis
Series: MAY 2018

PM – May 2018 – L2 – Q1 – Divisional Performance Measurement and Transfer Pricing

Differentiate responsibility centres, explain divisional structure, recommend transfer prices, and consider qualitative factors.

Question

DASET DRINKS NIGERIA PLC.
(30 MARKS)
Daset Drinks Nigeria Plc. has been operating in the Nigerian food and beverages
industry as an entity with three distinct factories across the country. One of the
factories bottles soft drink while the other two produce bottles and crown corks for
the soft drink factory.
The company has recently been experiencing problems with its performance
evaluation system across the three factories. Each factory manager is of the
opinion that his factory is the one contributing the most to the overall performance
of the company.
In a recent management retreat, the guest speaker, a performance management
expert, emphasised the need to develop Key Performance Indicators (KPI) for each
of the factories and departments in the company. According to him, this will
enhance performance evaluation of all the managers in the company and will also
make performance management easier. He suggested that the company should
adopt a divisional structure whereby each of the factories will become an
autonomous division with responsibilities for investment, revenues, profits and
costs.
At the last Executive Management meeting, after the retreat, the company‟s top
management decided to adopt the recommendations of the guest speaker. The top
management agreed transfer prices acceptable to each of the divisional managers
and also the needs to decide whether the two factories manufacturing bottles and
corks cocks could sell to external markets.
The top management has mandated you, as the company‟s management
accountant, to supply necessary data that will assist them in taking appropriate
decisions.

Financial data collected about the company‟s operations are as follows:
The costs and selling prices of the divisions are:

This includes costs of bottle and crown cork. To produce one bottle of soft drink
requires one bottle and one crown cork.
The bottling division has the choice to buy its bottle and crown cork requirements
from the external market.
The variable costs of production for external sales and internal transfers are the
same and bottles and crown corks are being transferred to the bottling division at
these costs.
For brand protection, the soft drink factory is not willing to buy bottles and crown
corks from any external supplier.
Required:
a. Differentiate among an investment centre, a profit centre, a revenue centre
and a cost centre, in a divisional organisation giving one example of each.
(8 Marks)

b. Explain a divisional structure, stating the problems associated with this type
of structure in an organisation. (8 Marks)

c. Advise the top management on the transfer prices that will maximise the
company‟s profit and be acceptable to the factory managers.
(10 Marks)
d. Discuss TWO qualitative factors that the top management needs to consider
in taking these decisions. (4 Marks)

Answer

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Tags: Cost Centre, Decision Making, Divisional Structure, Investment Centre, Performance Evaluation, Profit Centre, Qualitative Factors, Revenue Centre, Transfer Pricing
Level: Level 2

Topic: Divisional Performance Measurement, Transfer Pricing
Series: MAY 2018

PM – May 2019 – L2 – Q4 – Balanced Scorecard

Analyze BOK's financial performance and evaluate its balanced scorecard metrics for decision-making.

Question

BOK is an autonomous division of Large Plc. BOK carries out large engineering jobs to individual customer specifications. The manager of the division will retire within next year, and Henry Femi, the CEO of Large Plc., has used a recruitment agency to identify a suitable successor, Mary Tako. Henry believes that Mary has excellent relevant experience in another company in the country and has offered her a 4-year contract position at BOK. The terms of the offer include a generous compensation package linked to the profit earned by BOK during the 4 years. Henry believes that BOK has been a very successful division and that a high-calibre manager, such as Mary, has great potential to continue to expand that success. In order to impress Mary on the recent success of BOK, Henry provided her with the following comparative financial data about the recent performance of the division (Table 1):

Table 1: Comparative Financial Data

	2018	2017
Turnover	27,000,000	26,000,000
Net profit	5,600,000	5,200,000
Bad debts	132,000	130,000

It can be assumed that the inflation rate in each of the two years was 3% per annum.

Mary indicated that she would need some additional information before deciding on whether to accept the employment offer. The following is an extract from a balanced scorecard (Table 2) which was prepared at Mary’s request:

Table 2: Balanced Scorecard Data

Theme	2018	2017
Customer theme:
Number of customers	120	100
Average revenue per customer (₦)	225,000	260,000
Market share	9%	8%
Internal process theme:
Percentage of jobs completed with errors	3%	4%
Average job completion time (days)	5.5	7
Learning & growth themes:
Staff turnover rate	10%	5%
Training expenditure (₦)	1,000,000	1,000,000

Required:

a. i. Analyze the change in the financial performance of BOK between 2017 and 2018 using the information provided in Table 1. (3 Marks)

ii. Evaluate the change in the performance of BOK between 2017 and 2018, using the information contained in the balanced scorecard (Table 2). In addition, discuss the significant reasons why this analysis may be more relevant than your answer to part (ai) in helping Mary to decide whether or not to accept the offer. (13 Marks)

b. Mary has indicated that she would only be willing to accept the employment offer if she can be convinced about the potential for growth in the division. As the outgoing manager, you are required to provide her with an analysis of BOK’s competitive position and growth prospects based on the information provided. (4 Marks)

Answer

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Tags: Balanced Scorecard, Financial Analysis, Management Decisions, Performance Measurement
Level: Level 2

Topic: Balanced Scorecard
Series: MAY 2019

PM – May 2019 – L2 – Q3 – Divisional Performance Measurement

Calculate and analyze ROCE for Peterpan's subsidiaries and discuss performance excluding intra-group transactions.

Question

Peterpan Nigeria Limited is a holding company with two subsidiaries manufacturing similar products in different regions of the country. These are Peterpan (Eastern) Nigeria Limited and Peterpan (Western) Nigeria Limited. Return on capital employed (ROCE) is used as the group’s performance measure and is also used to determine divisional managers’ bonuses. The results of the two companies and of the holding company for the year ended 31 December, 2018, and the statement of financial position as at that date are as follows:

Item	Western (₦000)	Eastern (₦000)	Peterpan (₦000)
Revenue	400,000	440,000	792,941
Cost of sales	(340,000)	(330,000)	(630,000)
Gross profit	60,000	110,000	162,941
Administrative costs	(20,000)	(60,000)	(80,000)
Interest payable	(20,000)	–	(20,000)
Pre-tax profit	20,000	60,000	62,941

Non-current assets:

Item
Original cost	2,000,000	300,000	3,000,000
Accumulated depreciation	(1,180,800)	(320,000)	(2,213,568)
Net book value	819,200	120,000	786,432
Net current assets	100,000	120,000	906,432
Total assets	919,200	906,432	1,825,632
Non-current borrowings	300,000	–	300,000
Shareholders’ fund	619,200	786,432	1,525,632
Capital employed	919,200	906,432	1,825,632

Additional Information:

During the year, Eastern Limited sold goods to Western Limited that had cost Eastern Limited ₦20,000,000. The transactions relating to this sale have been eliminated from the holding company’s results stated above.
Both companies use the same depreciation policy of 20% per annum on a reducing balance basis for their non-current assets. Neither company made any additions or disposals of non-current assets during the year.
During the last board meeting of the holding company, it was decided that the holding company should impose a transfer pricing policy for transfers between the two subsidiaries.

Required:

a. Calculate the return on capital employed (ROCE) ratios for each of the two subsidiaries for the year and analyze these into their secondary ratio components of: i. Pre-Tax Profit % ii. Asset Turnover (3 Marks)

b. i. Calculate Eastern Limited’s gross profit margin on its internal sales and compare this to the gross profit margin on its external sales. (2 Marks)
ii. Discuss the performance of the two subsidiaries excluding the effects of the intra-group transactions. (9 Marks)

c. Explain THREE factors that management should consider when setting the transfer pricing policy. (6 Marks)
(Total 20 Marks)

Answer

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Tags: Financial Performance, Profitability, ROCE, Subsidiaries, Transfer Pricing
Level: Level 2

Topic: Divisional Performance Measurement
Series: MAY 2019

Subject: PERFORMANCE MANAGEMENT

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