QUESTION ONE

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

  • Updated: 26 Jul 20
  • |
  • Attempts:
  • |
  • Correct:

Need help?

Division A - ROI
QUESTION TWO

Ziada has been employed as a new manager of Lake view Division. The division has budgeted a net profit before tax of T.shs 30 million per annum over the period of the near future, based on a net capital employed of T.shs 100 million.
House rehabilitation anticipated over this period is expected to be approximately equal to the annual depreciation each year. The required rate of return of the company is 20% before tax.

Ziada is currently considering a substantial expansion of division factories to increase the capacity to cope with the forecast demands of division products. The top management is prepared to offer a five-year contract that will provide Lake view division with annual income of T.shs 20 million.

In order to meet this contract, a total additional capital outlay of T.shs 20 million is envisaged being T.shs 15 million of new fixed assets plus T.shs 5 million working capital. A five –year life of new fixed assets are expected.
Operating costs on the contract are estimated to be T.shs 13.5 million per annum, excluding depreciation.

Required:

  1. Calculate the impact of accepting the contract on the Lake view divisional Return on Investment and Residual Income.
  2. Indicate whether it would be attractive to Ziada to undertake this contract

  • Updated: 26 Jul 20
  • |
  • Attempts: 95
  • |
  • Correct: 38

Need help?

New Project Annual Depreciation
QUESTION THREE

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:-

North Division South Division
T.shs T.shs
Net profit 24,000,000 6,500,000
Current Assets 28,000,000 20,000,000
Non-Current Assets (at cost) 92,000,000 110,000,000

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.

  • Updated: 26 Jul 20
  • |
  • Attempts: 57
  • |
  • Correct: 31

Need help?

Project X profit
Unique visitors
Page views