58
YAND Z
yl and Z are two divisions or a large company that operate in similar markets. The divisions
are treated as TnvestmeHt centres and every month they each p_repare an operating
statement to be submitted to the parent company. Operating .statements for these two
divisions for October are shown b�low:
Operating statements for October
y
z
Less variable costs
$000
900
345
$000
555
312
Cbntribution
555
243
.98
42,.
Controllable income
L,ss apportioned central costs
460
338
201
180
Net Income before ta?( .,
122
Tbtal divisional _net as2ets
S9.76m
-·
21
Sales revenue
Less controllable fixed costs (includes
depreciation on divisional assets}
$1.26m
The company currently has a target return on capital of 12% per annum. However, the
company believes its cost of capital is hkely to rise and is considering increasing the target
rtturn on capltal.
At present the performance of each division and the divisional
management are assessed primarily on the basis of Return on Investment (ROI) ....
Req ired:
-
\.,
for divisions Y· and Z
(a)
(ROI)
Calculate tht. annualised Return on Investment
(b)
Calculate the annualised Residual Income (RI) for divisions� �nd �·
(c}
Briefly discuss the strengths and weaknesses of ROI and RI as methods of assessing
the performance of divisions. Explain two further methods of assessment of
divisional performance that could be used in addition to ROI or RI.
(b)
· to-two d'rvi'slons, A and B . each �ilh their own cost and revenue streams Each of the divisions
1 ,n
Brace C o 1s
· sp1·t
..
. .
. . ·�
,..e c:·1v1s1�n.
w1th1n
is managed· by a divisional manager who has the power to make all inv�s_tment dec1s1ons
been
ca_lcu!abn_g
by
have
made
dec1s1ons
investment
Historically,
12%.
Is
divisions'
both
for
The cost' of capital
the ·return-on-investment (ROil al-any opportunities..and·at present, the return on Investment of eac/1 d1V1s1on is
16%.
A new manager who has recently been appointed in division A h s argued that using residual income (RI) to
?
make investment decisions would result in 'better goal congruence throughout the company.
Each division is currently considering the following sepc1rate investm�nts:
Capital required for investment
Sales generated by investment
Net profit margin
Project for Division A
$82·8 million
$44·6 millio n
28%
Project for Division B
$40·6 million
$21 ·8 million
33%
The company is seeking to maximise shareholder wealth.
Required:
.-
·
for ea h of the two
Calculate both the return on investment and residual income of the new investment
�
.
divisions. Co_mmen l on these results , taking Jnlo consideration the manager's views about residual mcome.
no marks)
(20 marks)
Divis ionalisa tio n:
In gen�ral, a large organization can be structured in one of the two ways
•
•
FunctionaJly (all ai:tivities of a similar type within a company such as produccion,
sales, research., under the control of appropriate department head)
Pivisionally (Split into divisions i� accordance with products made)
Division managers are therefore responsible for all operations relating to their product.
In general, a divis�onalised structure will lead to ·decentralization' of decision making
proces� and divisional managers may have the freedom to set selling prices, choose
suppliers, make product mix and so on.
Advantages of divisionalisation:
• bivisionalisation can i�prove the quality of decisions made because divisional
anagers know local �onditions and are able to take more informed deci�ions.
r
•
•
Decisions should be taken more quickly because information does not have to pass
liong the chain of command to and from top management
f
he authority to act to improve performance shouJd motivate divisional mangers
• ·f ivisioaalisation allows top management to devote more time to strategic
.,
lanni�g and frees top management from . detailed involvement in day to day
J
perauons
l
pivisionalisation provides valuable training grounds for future members of top
management by giving them experience .Qf managerial skills in a less complex
environment than that faced by top management
Disadvantages of divisionalisation:
•
•
•
A danger with divisionalisation is that organization will divide into a number of
self interested segments, each acting at times against the interests of other
$egments. Decisions might be taken by a divisional manager in the best interests of
bis' own part, but possibly against the interests of organization as a whole
�t is claimed that cost of activities that are common to all divisions (such as
running the accounts department) may be greater for a divisionalised strucrure
than for a centralized structure
top management, by delegating decision making may lose control since they are
t aware of what is going on in the organization
r
Measuring division's performances:
The perifi' onnance of a division can be measured using ROI or RI or both
l
ROI Return on Investment):
ROI shQw5 how much profit has been made in relation to amount of capit:il employed
ROI== .f>rofit before Interest and Tax x 100
2
Mobe Co manufactures electronic mobility scooters. The company is split into two divisions: the scooter division
(Division S) and the motor division (Division M). Division M supplies electronic motors to both Division S and to
external customers. The two divisions run as autonomously as possible, subject to the group’s current policy that
Division M must make internal sales first before selling outside the group; and that Division S must always buy its
motors from Division M. However, this company policy, together with the transfer price which Division M charges
Division S, is currently under review.
Details of the two divisions are given below.
Division S
Division S’s budget for the coming year shows that 35,000 electronic motors will be needed. An external supplier
could supply these to Division S for $800 each.
Division M
Division M has the capacity to produce a total of 60,000 electronic motors per year. Details of Division M’s budget,
which has just been prepared for the forthcoming year, are as follows:
Budgeted sales volume (units)
Selling price per unit for external sales of motors
Variable costs per unit for external sales of motors
60,000
$850
$770
The variable cost per unit for motors sold to Division S is $30 per unit lower due to cost savings on distribution and
packaging.
Maximum external demand for the motors is 30,000 units per year.
Required:
Assuming that the group’s current policy could be changed, advise, using suitable calculations, the number of
motors which Division M should supply to Division S in order to maximise group profits. Recommend the transfer
price or prices at which these internal sales should take place.
Note: All relevant workings must be shown.
(10 marks)
9
[P.T.O.
5
The Biscuits division (Division B) and the Cakes division (Division C) are two divisions of a large, manufacturing
company. Whilst both divisions operate in almost identical markets, each division operates separately as an
investment centre. Each month, operating statements must be prepared by each division and these are used as a
basis for performance measurement for the divisions.
Last month, senior management decided to recharge head office costs to the divisions. Consequently, each division
is now going to be required to deduct a share of head office costs in its operating statement before arriving at ‘net
profit’, which is then used to calculate return on investment (ROI). Prior to this, ROI has been calculated using
controllable profit only. The company’s target ROI, however, remains unchanged at 20% per annum. For each of the
last three months, Divisions B and C have maintained ROIs of 22% per annum and 23% per annum respectively,
resulting in healthy bonuses being awarded to staff. The company has a cost of capital of 10%.
The budgeted operating statement for the month of July is shown below:
Sales revenue
Less variable costs
Contribution
Less controllable fixed costs
Controllable profit
Less apportionment of head office costs
Net profit
Divisional net assets
B
$’000
1,300
(700)
––––––
600
(134)
––––––
466
(155)
––––––
311
––––––
$23·2m
C
$’000
1,500
(800)
––––––
700
(228)
––––––
472
(180)
––––––
292
––––––
$22·6m
Required
(a) Calculate the expected annualised Return on Investment (ROI) using the new method as preferred by senior
management, based on the above budgeted operating statements, for each of the divisions.
(2 marks)
(b) The divisional managing directors are unhappy about the results produced by your calculations in (a) and have
heard that a performance measure called ‘residual income’ may provide more information.
Calculate the annualised residual income (RI) for each of the divisions, based on the net profit figures for the
month of July.
(3 marks)
(c) Discuss the expected performance of each of the two divisions, using both ROI and RI, and making any
additional calculations deemed necessary. Conclude as to whether, in your opinion, the two divisions have
performed well.
(6 marks)
(d) Division B has now been offered an immediate opportunity to invest in new machinery at a cost of $2·12 million.
The machinery is expected to have a useful economic life of four years, after which it could be sold for $200,000.
Division B’s policy is to depreciate all of its machinery on a straight-line basis over the life of the asset. The
machinery would be expected to expand Division B’s production capacity, resulting in an 8·5% increase in
contribution per month.
Recalculate Division B’s expected annualised ROI and annualised RI, based on July’s budgeted operating
statement after adjusting for the investment. State whether the managing director will be making a decision
that is in the best interests of the company as a whole if ROI is used as the basis of the decision.
(5 marks)
(e) Explain any behavioural problems that will result if the company’s senior management insist on using solely
ROI, based on net profit rather than controllable profit, to assess divisional performance and reward staff.
(4 marks)
(20 marks)
6
3
The Rotech group comprises two companies, W Co and C Co.
W Co is a trading company with two divisions: The Design division, which designs wind turbines and supplies the
designs to customers under licences and the Gearbox division, which manufactures gearboxes for the car industry.
C Co manufactures components for gearboxes. It sells the components globally and also supplies W Co with
components for its Gearbox manufacturing division.
The financial results for the two companies for the year ended 31 May 2014 are as follows:
External sales
Sales to Gearbox division
Cost of sales
Administration costs
Distribution costs
Operating profit
Capital employed
W Co
Design division
Gearbox division
$’000
$’000
14,300
25,535
(4,900)
(3,400)
–
–––––––
6,000
–––––––
–––––––
23,540
(16,200)*
(4,200)
(1,260)
–––––––
3,875
–––––––
–––––––
32,320
C Co
$’000
8,010
7,550
–––––––
15,560
–––––––
(5,280)
(2,600)
(670)
–––––––
7,010
–––––––
–––––––
82,975
* Includes cost of components purchased from C Co.
Required:
(a) Discuss the performance of C Co and each division of W Co, calculating and using the following three
performance measures:
(i) Return on capital employed (ROCE)
(ii) Asset turnover
(iii) Operating profit margin
Note: There are 4·5 marks available for calculations and 5·5 marks available for discussion.
(10 marks)
(b) C Co is currently working to full capacity. The Rotech group’s policy is that group companies and divisions must
always make internal sales first before selling outside the group. Similarly, purchases must be made from within
the group wherever possible. However, the group divisions and companies are allowed to negotiate their own
transfer prices without interference from Head Office.
C Co has always charged the same price to the Gearbox division as it does to its external customers. However,
after being offered a 5% lower price for similar components from an external supplier, the manager of the Gearbox
division feels strongly that the transfer price is too high and should be reduced. C Co currently satisfies 60% of
the external demand for its components. Its variable costs represent 40% of revenue.
Required:
Advise, using suitable calculations, the total transfer price or prices at which the components should be
supplied to the Gearbox division from C Co.
(10 marks)
(20 marks)
4
32 Thatcher International Park (TIP) is a theme park and has for many years been a successful business, which has
traded profitably. About three years ago the directors decided to capitalise on their success and reduced the
expenditure made on new thrill rides, reduced routine maintenance where possible (deciding instead to repair
equipment when it broke down) and made a commitment to regularly increase admission prices. Once an admission
price is paid customers can use any of the facilities and rides for free.
These steps increased profits considerably, enabling good dividends to be paid to the owners and bonuses to the
directors. The last two years of financial results are shown below.
Sales
Less expenses:
Wages
Maintenance – routine
Repairs
Directors’ salaries
Directors’ bonuses
Other costs (including depreciation)
Net profit
Book value of assets at start of year
Dividend paid
Number of visitors
20X4
$
5,250,000
20X5
$
5,320,000
2,500,000
80,000
260,000
150,000
15,000
1,200,000
––––––––––
1,045,000
––––––––––
2,200,000
70,000
320,000
160,000
18,000
1,180,000
––––––––––
1,372,000
––––––––––
13,000,000
500,000
150,000
12,000,000
650,000
140,000
TIP operates in a country where the average rate of inflation is around 1% per annum.
Required:
(a) Assess the financial performance of TIP using the information given above.
(14 marks)
During the early part of 20X4 TIP employed a newly qualified management accountant. He quickly became concerned
about the potential performance of TIP and to investigate his concerns, he started to gather data to measure some
non-financial measures of success. The data he has gathered is shown below:
Table 1
20X4
9,000 hours
20 minutes
Hours lost due to breakdown of rides (see note 1)
Average waiting time per ride
20X5
32,000 hours
30 minutes
Note 1: TIP has 50 rides of different types. It is open 360 days of the year for 10 hours each day
Required:
(b) Assess the QUALITY of the service which TIP provides to its customers using Table 1 and any other relevant
data and indicate the RISKS it is likely to face if it continues with its current policies.
(6 marks)
(20 marks)
15
[P.T.O.
2
Oliver is the owner and manager of Oliver’s Salon which is a quality hairdresser that experiences high levels of
competition. The salon traditionally provided a range of hair services to female clients only, including cuts, colouring
and straightening
A year ago, at the start of his 2009 financial year, Oliver decided to expand his operations to include the hairdressing
needs of male clients. Male hairdressing prices are lower, the work simpler (mainly hair cuts only) and so the time
taken per male client is much less.
The prices for the female clients were not increased during the whole of 2008 and 2009 and the mix of services
provided for female clients in the two years was the same.
The latest financial results are as follows:
2008
$
Sales
Less cost of sales:
Hairdressing staff costs
Hair products – female
Hair products – male
Gross profit
Less expenses:
Rent
Administration salaries
Electricity
Advertising
2009
$
200,000
65,000
29,000
$
$
238,500
91,000
27,000
8,000
–––––––
–––––––
94,000
––––––––
106,000
10,000
9,000
7,000
2,000
–––––––
126,000
––––––––
112,500
10,000
9,500
8,000
5,000
–––––––
Total expenses
28,000
––––––––
78,000
––––––––
Profit
32,500
––––––––
80,000
––––––––
Oliver is disappointed with his financial results. He thinks the salon is much busier than a year ago and was expecting
more profit. He has noted the following extra information:
1.
Some female clients complained about the change in atmosphere following the introduction of male services,
which created tension in the salon.
2.
Two new staff were recruited at the start of 2009. The first was a junior hairdresser to support the specialist
hairdressers for the female clients. She was appointed on a salary of $9,000 per annum. The second new staff
member was a specialist hairdresser for the male clients. There were no increases in pay for existing staff at the
start of 2009 after a big rise at the start of 2008 which was designed to cover two years’ worth of increases.
Oliver introduced some non-financial measures of success two years ago.
2008
12
0
8,000
4
0
Number of complaints
Number of male client visits
Number of female client visits
Number of specialist hairdressers for female clients
Number of specialist hairdressers for male clients
4
2009
46
3,425
6,800
5
1
Required:
(a) Calculate the average price for hair services per male and female client for each of the years 2008 and 2009.
(3 marks)
(b) Assess the financial performance of the Salon using the data above.
(11 marks)
(c) Analyse and comment on the non-financial performance of Oliver’s business, under the headings of quality
and resource utilisation.
(6 marks)
(20 marks)
5
[P.T.O.
4
A manufacturing company, Man Co, has two divisions: Division L and Division M. Both divisions make a single
standardised product. Division L makes component L, which is supplied to both Division M and external customers.
Division M makes product M using one unit of component L and other materials. It then sells the completed
product M to external customers. To date, Division M has always bought component L from Division L.
The following information is available:
Selling price
Direct materials:
Component L
Other
Direct labour
Variable overheads
Selling and distribution costs
Contribution per unit before fixed costs
Annual fixed costs
Annual external demand (units)
Capacity of plant
Component L
$
40
Product M
$
96
(12)
(6)
(2)
(4)
–––
16
–––
(40)
(17)
(9)
(3)
(1)
–––
26
–––
$500,000
160,000
300,000
$200,000
120,000
130,000
Division L charges the same price for component L to both Division M and external customers. However, it does not
incur the selling and distribution costs when transferring internally.
Division M has just been approached by a new supplier who has offered to supply it with component L for $37 per
unit. Prior to this offer, the cheapest price which Division M could have bought component L for from outside the
group was $42 per unit.
It is head office policy to let the divisions operate autonomously without interference at all.
Required:
(a) Calculate the incremental profit/(loss) per component for the group if Division M accepts the new supplier’s
offer and recommend how many components Division L should sell to Division M if group profits are to be
maximised.
(3 marks)
(b) Using the quantities calculated in (a) and the current transfer price, calculate the total annual profits of each
division and the group as a whole.
(6 marks)
(c) Discuss the problems which will arise if the transfer price remains unchanged and advise the divisions on a
suitable alternative transfer price for component L.
(6 marks)
(15 marks)
5
[P.T.O.
2
Ties Only is a new business, selling high quality imported men’s ties via the internet. The managers, who also own
the company, are young and inexperienced but they are prepared to take risks. They are confident that importing
quality ties and selling via a website will be successful and that the business will grow quickly. This is despite the
well recognised fact that selling clothing is a very competitive business.
They were prepared for a loss-making start and decided to pay themselves modest salaries (included in administration
expenses in table 1 below) and pay no dividends for the foreseeable future.
The owners are so convinced that growth will quickly follow that they have invested enough money in website server
development to ensure that the server can handle the very high levels of predicted growth. All website development
costs were written off as incurred in the internal management accounts that are shown below in table 1.
Significant expenditure on marketing was incurred in the first two quarters to launch both the website and new
products. It is not expected that marketing expenditure will continue to be as high in the future.
Customers can buy a variety of styles, patterns and colours of ties at different prices.
The business’s trading results for the first two quarters of trade are shown below in table 1
Table 1
$
Sales
less Cost of Sales
Gross Profit
less expenses
Website development
Administration
Distribution
Launch marketing
Other variable expenses
Total expenses
Loss for quarter
Quarter 1
$
420,000
(201,600)
––––––––
218,400
120,000
100,500
20,763
60,000
50,000
––––––––
$
Quarter 2
$
680,000
(340,680)
––––––––
339,320
90,000
150,640
33,320
40,800
80,000
––––––––
(351,263)
––––––––
(132,863)
––––––––
(394,760)
––––––––
(55,440)
––––––––
Required:
(a) Assess the financial performance of the business during its first two quarters using only the data in table 1
above.
(12 marks)
(b) Briefly consider whether the losses made by the business in the first two quarters are a true reflection of the
current and likely future performance of the business.
(4 marks)
4
The owners are well aware of the importance of non-financial indicators of success and therefore have identified a
small number of measures to focus on. These are measured monthly and then combined to produce a quarterly
management report.
The data for the first two quarters management reports is shown below:
Table 2
Quarter 1
Quarter 2
Website hits*
690,789
863,492
Number of ties sold
27,631
38,857
On time delivery
95%
89%
Sales returns
12%
18%
System downtime
2%
4%
* A website hit is automatically counted each time a visitor to the website opens the home page of Ties Only.
The industry average conversion rate for website hits to number of ties sold is 3·2%. The industry average sales return
rate for internet-based clothing sales is 13%.
Required:
(c) Comment on each of the non-financial data in table 2 above taking into account, where appropriate, the
industry averages provided, providing your assessment of the performance of the business.
(9 marks)
(25 marks)
5
[P.T.O.
4
Jamair was founded in September 2007 and is one of a growing number of low-cost airlines in the country of Shania.
Jamair’s strategy is to operate as a low-cost, high efficiency airline, and it does this by:
–
–
–
–
–
Operating mostly in secondary cities to reduce landing costs.
Using only one type of aircraft in order to reduce maintenance and operational costs. These planes are leased
rather than bought outright.
Having only one category of seat class.
Having no pre-allocated seats or in-flight entertainment.
Focusing on e-commerce with customers both booking tickets and checking in for flights online.
The airline was given an ‘on time arrival’ ranking of seventh best by the country’s aviation authority, who rank all 50
of the country’s airlines based on the number of flights which arrive on time at their destinations. 48 Jamair flights
were cancelled in 2013 compared to 35 in 2012. This increase was due to an increase in the staff absentee rate at
Jamair from 3 days per staff member per year to 4·5 days.
The average ‘ground turnaround time’ for airlines in Shania is 50 minutes, meaning that, on average, planes are on
the ground for cleaning, refuelling, etc for 50 minutes before departing again. Customer satisfaction surveys have
shown that 85% of customers are happy with the standard of cleanliness on Jamair’s planes.
The number of passengers carried by the airline has grown from 300,000 passengers on a total of 3,428 flights in
2007 to 920,000 passengers on 7,650 flights in 2013. The overall growth of the airline has been helped by the
limited route licensing policy of the Shanian government, which has given Jamair almost monopoly status on some
of its routes. However, the government is now set to change this policy with almost immediate effect, and it has
become more important than ever to monitor performance effectively.
Required:
(a) Describe each of the four perspectives of the balanced scorecard.
(6 marks)
(b) For each perspective of the balanced scorecard, identify one goal together with a corresponding performance
measure which could be used by Jamair to measure the company’s performance. The goals and measures
should be specifically relevant to Jamair. For each pair of goals and measures, explain why you have chosen
them.
(9 marks)
(15 marks)
12
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2
Bus Co is a large bus operator, operating long-distance bus services across the country. There are two other national
operators in the country. Bus Co’s mission is to ‘be the market leader in long-distance transport providing a greener,
cleaner service for passengers nationwide’. Last month, an independent survey of 40,000 passengers was carried
out, the results of which are shown in the table below:
Table: Bus passenger satisfaction % by national operator
Operator
Bus
Prime
Express
Overall satisfaction Value for money
*
67
*
58
*
67
Punctuality
80
76
76
Journey time
82
83
89
* denotes that the percentage has not yet been calculated.
The ‘overall satisfaction’ percentages, which have not yet been inserted into the table, are calculated using a weighted
average which reflects the importance customers place on each of the other three criteria above. The weightings used
are as follows:
Value for money
Punctuality
Journey time
40%
32%
28%
The managing director (MD) of Bus Co has said: ‘Independent research has shown that our customers are the most
satisfied of any national bus operator. We are now leading the way on what matters most to customers – value for
money and punctuality.’
Required:
(a) Calculate the ‘overall satisfaction’ percentage for each operator.
(2 marks)
(b) Taking into account all the data in the table and your calculations from part (a), discuss whether the
managing director’s statement is true.
(4 marks)
(c) When measuring performance using a ‘value for money’ approach, the criteria of economy, efficiency and
effectiveness can be used.
Required:
Briefly define ‘efficiency’ and ‘effectiveness’ and suggest one performance measure for EACH, which would
help Bus Co assess the efficiency and effectiveness of the service it provides.
(4 marks)
(10 marks)
3
[P.T.O.
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