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SOUTH PLC has two divisions A and B, whose respective performances are under review.
Division A is currently earning a profit of T.shs 35,000,000 and has net assets of T.shs 150,000,000.
Division B currently earns a profit of T.shs 70,000,000 with net assets of T.shs 325,000,000.
South PLC has a current cost of capital of 15 percent.

Required;

• Using the information above, calculate the ROI and RI figures for the two divisions under review and comment on your results.
• State which method of performance evaluation would be more useful when comparing divisional performance and why
• List three general aspects of performance measures that would be appropriate for a service sector company

PAMBANIA Limited is a large public company which is organised into autonomous divisions under which a substantial degree of decentralized decision-making takes place. For the purposes of managerial performance measurement, a return on capital employed (ROCE) is calculated by relating net profit to gross capital employed. This company interprets gross capital employed as current assets plus non-current assets at their original cost. For external reporting purposes the company adopts the straight-line method of depreciation. The company estimates its cost of capital to be 15% per annum.

Extracts from the budgeted results for 2021 of North Division and South Division of the PAMBANIA Limited are shown below:-

There are two projects which are being considered by the division managers. Neither of them is included in the figures given above. They are:-

1. Project X which was developed by the Central Marketing department. There is potential for an increase of Tshs. 30,000,000 annual sales by North Division if they spend Tshs. 4,200,000 annually on an advertising campaign. It will also require the stock holding of the products involved to increase by Tshs. 10,000,000 on average. The contribution/sales ratio of these products is 20%.
2. Project Y relates to some new manufacturing equipment which senior management considers necessary. New equipment costing Tshs. 25,000,000= can be purchased by South Division in order to improve its manufacturing efficiency. Annual operating cash flows, before depreciation, could increase by Tshs. 8,000,000. The new equipment should last for five years.

Required:

1. Determine the budgeted return on capital employed (ROCE) for each division:-
1. before the two projects are incorporated;
2. assuming the managers adopt the projects available to their division and incorporate them in their budgets.
2. Comment on the results produced in (a) above describing how the head office and division management would, on financial grounds, be likely to react to the projects.