Divisional performance

MA – L2 – Q69 – Performance Analysis

Evaluate the performance of XYZ Group's three product segments using financial data and an analytical model.

Question

It is now the end of Year 2. XYZ Group has three divisions, each producing and selling a different group of products. Information about the financial performance of each division/product group is as follows.

Segment A	Year 1	Year 2	Year 3 (forecast)
	GH¢000	GH¢000	GH¢000
Sales	8,000	8,323	8,741
Cost of sales	4,400	4,520	4,610
Gross profit	3,600	3,803	4,131
Transport costs	400	415	430
R&D expenditure	low	low	Low
Market share	11%	10%	8%
Sales volume index	100	102	104

Segment B	Year 1	Year 2	Year 3 (forecast)
	GH¢000	GH¢000	GH¢000
Sales	10,000	11,220	12,600
Cost of sales	6,000	6,480	7,000
Gross profit	4,000	4,740	5,600
Transport costs	350	390	450
R&D expenditure	high	high	high
Market share	27%	27%	27%
Sales volume index	100	110	121

Segment C	Year 1	Year 2	Year 3 (forecast)
	GH¢000	GH¢000	GH¢000
Sales	6,000	5,600	5,400
Cost of sales	3,900	4,080	4,210
Gross profit	2,100	1,520	1,190
Transport costs	360	476	540
R&D expenditure	medium	medium	medium
Market share	20%	20%	20%
Sales volume index	100	107	114

Required:
Use this information to evaluate the performance of the three product groups. You should try to use an analytical model to support your financial analysis.

Answer

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Tags: BCG Matrix, Divisional performance, Financial analysis, Market share, Performance Analysis, R&D expenditure, Sales volume
Level: Level 2

Topic: Divisional performance, Performance Analysis

MA – L2 – Q67 – Performance Analysis

Evaluate financial performance of three divisions of XYZ Group using an analytical model, based on provided financial data for Years 1-3.

Question

XYZ GROUP: FINANCIAL ANALYSIS
It is now the end of Year 2. XYZ Group has three divisions, each producing and selling a different group of products. Information about the financial performance of each division/product group is as follows.

Division A	Year 1	Year 2	Year 3 (forecast)
Sales	GH₵000	GH₵000	GH₵000
	8,000	8,323	8,741
Cost of sales	4,400	4,520	4,610
Gross profit	3,600	3,803	4,131
Transport costs	400	415	430
R&D expenditure	low	low	low
Market share	11%	10%	8%
Sales volume index	100	102	104

Division B	Year 1	Year 2	Year 3 (forecast)
Sales	GH₵000	GH₵000	GH₵000
	10,000	11,220	12,600
Cost of sales	6,000	6,480	7,000
Gross profit	4,000	4,740	5,600
Transport costs	350	390	450
R&D expenditure	high	high	high
Market share	27%	27%	27%
Sales volume index	100	110	121

Division C	Year 1	Year 2	Year 3 (forecast)
Sales	GH₵000	GH₵000	GH₵000
	6,000	5,600	5,400
Cost of sales	3,900	4,080	4,210
Gross profit	2,100	1,520	1,190
Transport costs	360	476	540
R&D expenditure	medium	medium	medium
Market share	20%	20%	20%
Sales volume index	100	107	114

Required:
Use this information to evaluate the performance of the three product groups. You should try to use an analytical model to support your financial analysis.

Answer

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Tags: Divisional performance, Financial analysis, Market share, Performance Analysis, R&D expenditure, Ratio Analysis, Sales volume
Level: Level 2

Topic: Divisional performance, Performance Analysis

MA – L2 – Q65 – Transfer Pricing

Prepare profit statements for Kumasi Construction Materials Ltd at 80% and 100% capacity with transfer prices of GH₵200 and GH₵180.

Question

Kumasi Construction Materials Ltd is organised into two trading divisions. Division A makes materials that are used to manufacture special bricks. It transfers some of these materials to Division B and sells some of the materials externally to other brick manufacturers. Division B makes special bricks from the materials and sells them to traders in building materials.

The production capacity of Division A is 2,000 tonnes per month. At present, sales are limited to 1,000 tonnes to external customers and 600 tonnes to Division B.

The transfer price was agreed at GH₵200 per tonne in line with the external sales trade price at 1st July which was the beginning of the budget year. From 1st December, however, strong competition in the market has reduced the market price for the materials to GH₵180 per tonne.

The manager of Division B is now saying that the transfer price for the materials from Division A should be the same as for external customers. The manager of Division A rejects this argument on the basis that the original budget established the transfer price for the entire financial year.

From each tonne of materials, Division B produces 1,000 bricks, which it sells at GH₵0.40 per brick. It would sell a further 400,000 bricks if the price were reduced to GH₵0.32 per brick.

Other data relevant are given below:

Division A	Division B
GH₵	GH₵
Variable cost per tonne	70
Fixed cost per month	100,000

The variable costs of Division B exclude the transfer price of materials from Division A.

Required:
(a) Prepare estimated profit statements for the month of December for each division and for Kumasi Construction Materials Ltd as a whole, based on transfer prices of GH₵200 per tonne and of GH₵180 per tonne, when producing at
(i) 80% capacity
(ii) 100% capacity, on the assumption that Division B reduces the selling price to GH₵0.32.

(b) Comment on the effect that might result from a change in the transfer price from GH₵200 to GH₵180.

(c) Suggest an alternative transfer price that would provide an incentive for Division B to reduce the selling price and increase sales by 400,000 bricks a month.

Answer

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Tags: Capacity Utilization, Divisional performance, Internal Transfers, Profit Statements, transfer pricing
Level: Level 2

Topic: Divisional performance, Transfer pricing

MA – L2 – Q64 – Transfer Pricing

Evaluate transfer pricing objectives and calculate company contribution for Keta Fitness Ltd's divisions.

Question

KETA FITNESS LTD
(a) Objectives of Transfer pricing include the following:
(i) Goal congruence
(ii) Performance evaluation
(iii) Divisional authority
(iv) Tax minimisation
(v) Motivation
(b) The company’s contribution as a whole

	DIVISION A	DIVISION B	COMPANY
Selling price	GH₵ 20,000	GH₵ 30,000	GH₵ 30,000
Incremental Cost (A)	(12,000)	(20,000)	(12,000)
Incremental Cost (B)	–	(15,000)	(15,000)
Contribution	8,000	(5,000)	3,000

(i) Should Division A transfer to Division B or sell as an intermediate product?
(ii) If there is excess capacity of 200 units, what would be the total contribution and the range of transfer prices for the excess capacity?

Answer

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Tags: Contribution Analysis, Divisional performance, goal congruence, Internal Transfers, Motivation, Performance Evaluation, transfer pricing
Level: Level 2

Topic: Transfer pricing

MA – L2 – Q63 – Transfer pricing

Define an optimal transfer price for Keta Shelving Limited.

Question

(A) Keta Shelving Limited, a company operating near Mount Adaklu, has two operating divisions, X and Y, that are treated as profit centres for the purpose of performance reporting.
Division X makes two products, Product A and Product B. Product A is sold to external customers for GH₵62 per unit. Product B is a part-finished item that is sold only to Division Y.
Division Y can obtain the part-finished item from either Division X or from an external supplier. The external supplier charges a price of GH₵55 per unit.
The production capacity of Division X is measured in total units of output, Products A and B. Each unit requires the same direct labour time. The costs of production in Division X are as follows:

	Product A	Product B
	GH₵	GH₵
Variable cost	46	48
Fixed cost	19	19
Full cost	65	67

Required:
(a) What is an optimal transfer price?

(b) What would be the optimal transfer price for Product B if there is spare production capacity in Division X?

(c) What would be the optimal transfer price for Product B if Division X is operating at full capacity due to a limited availability of direct labour, and there is unsatisfied external demand for Product A?

Answer

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Tags: Divisional performance, Full capacity, Opportunity cost, transfer pricing
Level: Level 2

Topic: Transfer pricing

MA – L2 – Q62 – Divisional performance

Calculate ROI for a new investment project at Kumasi Tech Ltd over three years.

Question

Kumasi Tech Ltd is organised into several investment centres. The annual performance of each investment centre is measured on the basis of ROI. ROI is measured each year as the profit before interest as a percentage of the average investment/average capital employed in the investment centre.
One of the investment centres has achieved a ROI in excess of 35% in each of the past four years. Its managers are considering a new investment project that will have the following cash flows:

Year	Cash flow
Beginning of Year 1	(42,000)
1–3	19,000 each year

The initial investment will be in an item of machinery that will have no residual value at the end of Year 3. Assume that depreciation is charged on a straight-line basis.
Required:
(a) Calculate the ROI for the project, each year and on average for the three-year period.

(b) Suggest whether the managers of the investment Centre are likely to invest in the project.

Answer

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Tags: Depreciation, Divisional performance, Investment centre, Performance Measurement, ROI
Level: Level 2

Topic: Divisional performance

MA – L1 – Q61 – Performance analysis

Calculate ROI for Keta Textiles Ltd for 5 years and assess division performance using ROI and other measures.

Question

Keta Textiles Ltd is planning to open a new investment centre, which will make and sell a single product. The investment in the new division at the beginning of the year will be GH¢2 million, consisting entirely of non-current assets. These are expected to have a five-year life with no residual value, and they will be depreciated each year at the rate of 20% of cost.
Sales in the first year of operation are expected to be GH¢4 million and the budgeted gross profit is 30%. Overhead costs excluding depreciation of non-current assets will be GH¢600,000 in Year 1.
The estimates for the first five years of operation are as follows:
(1) The company will not make any additional investment in non-current assets for the division in the first five years.
(2) The cost of sales per unit in the five years will remain constant, with no increases.
(3) Sales volume will be the same in Year 2 as in Year 1. Sales volume will then increase in Year 3 by 5% but will fall by 10% in Year 4 and a further 10% in Year 5.
(4) The sales price per unit will be increased by 5% in Year 2. There will be no change in sales prices in Year 3, but prices will be increased by 5% in Year 4 and again by 5% in Year 5.
(5) Overhead costs excluding depreciation will remain at GH¢600,000 for the first three years, but will then be GH¢700,000 in each of Years 4 and 5.

Required:
Calculate the return on investment for the division for each of the first five years, assuming that ROI is calculated using the net book value of assets at the beginning of the year.
Using ROI and any other measures of performance, assess the expected performance of the division over the five-year period.

Answer

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

Topic: Divisional performance, Performance Analysis

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

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

Topic: Performance Analysis

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MA – L2 – Q69 – Performance Analysis

Evaluate the performance of XYZ Group's three product segments using financial data and an analytical model.

MA – L2 – Q67 – Performance Analysis

Evaluate financial performance of three divisions of XYZ Group using an analytical model, based on provided financial data for Years 1-3.

MA – L2 – Q65 – Transfer Pricing

Prepare profit statements for Kumasi Construction Materials Ltd at 80% and 100% capacity with transfer prices of GH₵200 and GH₵180.

MA – L2 – Q64 – Transfer Pricing

Evaluate transfer pricing objectives and calculate company contribution for Keta Fitness Ltd's divisions.

MA – L2 – Q63 – Transfer pricing

Define an optimal transfer price for Keta Shelving Limited.

MA – L2 – Q62 – Divisional performance

Calculate ROI for a new investment project at Kumasi Tech Ltd over three years.

MA – L1 – Q61 – Performance analysis

Calculate ROI for Keta Textiles Ltd for 5 years and assess division performance using ROI and other measures.

MA – L2 – Q60 – Performance Analysis

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

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MA – L2 – Q69 – Performance Analysis

Evaluate the performance of XYZ Group's three product segments using financial data and an analytical model.

You're reporting an error for "MA – L2 – Q69 – Performance Analysis"

MA – L2 – Q67 – Performance Analysis

Evaluate financial performance of three divisions of XYZ Group using an analytical model, based on provided financial data for Years 1-3.

You're reporting an error for "MA – L2 – Q67 – Performance Analysis"

MA – L2 – Q65 – Transfer Pricing

Prepare profit statements for Kumasi Construction Materials Ltd at 80% and 100% capacity with transfer prices of GH₵200 and GH₵180.

You're reporting an error for "MA – L2 – Q65 – Transfer Pricing"

MA – L2 – Q64 – Transfer Pricing

Evaluate transfer pricing objectives and calculate company contribution for Keta Fitness Ltd's divisions.

You're reporting an error for "MA – L2 – Q64 – Transfer Pricing"

MA – L2 – Q63 – Transfer pricing

Define an optimal transfer price for Keta Shelving Limited.

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MA – L2 – Q62 – Divisional performance

Calculate ROI for a new investment project at Kumasi Tech Ltd over three years.

You're reporting an error for "MA – L2 – Q62 – Divisional performance"

MA – L1 – Q61 – Performance analysis

Calculate ROI for Keta Textiles Ltd for 5 years and assess division performance using ROI and other measures.

You're reporting an error for "MA – L1 – Q61 – Performance analysis"

MA – L2 – Q60 – Performance Analysis

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

You're reporting an error for "MA – L2 – Q60 – Performance Analysis"

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