334 Biscuit & Cakes

a) ROI
Division B Division C
Net profit (12 months) 3,732,000 3,504,000
Division net assets 23,200,000 22,600,000
ROI 16.09% 15.50%

b) RI
Division B Division C
Net profit (12 months) 3,732,000 3,504,000
Division net assets 23,200,000 22,600,000
Cost of capital (10%) 2,320,000 2,260,000
RI 1,412,000 1,244,000

c)
In comparing with the company's target ROI of 20%, the ROI of both B & C are fewer. Hence, based on ROI, both performa

For each of the last 3 months, B & C have maintained ROI of 22% per annum and 23% per annum respectively. However, th
annum are less than before. The reasons of such change could come from the decrement of operating profit
You didn't talk about RI. RI for both B and C are significant and positive. This is d
Comments: of 10% cost of capital as compared to target return of 20%
ROI of both B&C are less than the target ROI, NOT FEWER.
Both divisions did not meet expectations. NOT are not well as expectation
reason for this is not because of a decrease (not decrement) in operating profit b

Division B Division C
Head office cost (12 months) 1,860,000 2,160,000
Division net assets 23,200,000 22,600,000
% HQ cost/net assets 8.02% 9.56%
ROI without HQ cost 24.10% 25.06%

As per calculation above, the ROI with net profit before deduction of HQ cost of B & C are 24% and 25% respectively. In co
are better much (much better). Therefore, although the budgeted (not budgeted, actual) ROI of B & C decrease, that not m
than before. Instead that, the decrement (decrease) on ROI is because of the deduction of head office costs which are out

In conclusion, the performance of B & C are better than before

d)
Cost of new machinery 2,120,000
Net book value 200,000
Usage life (years) 4
Annual depreciation 480,000

Division B
Previous contribution 600,000
Annual Contribution (increase 8.5%) 7,812,000
Less controllable fixed cost (1,608,000)
Less depreciation cost of new machinery (480,000)
Less Head office cost (1,860,000)
Annual Net profit 3,864,000
previous Division net assets 23,200,000
New machinery 2,120,000
ROI 15.26%

Net profit (12 months) 3,864,000

Division net assets 25,320,000
Cost of capital (10%) 2,532,000
RI 1,332,000

The director should use ROI to assess the performance of each division and the whole company

Comments: the question asks for conclusion about the new investment. You didn't answer
ROI would be lower than before investment. RI would be less than before inves
This would not be in best interest of Company as a whole

e)

The senior management could manipulate the head office cost by increase the HO cost charged to the divisions. As a resul
the operating profit (net profit) is decrease and ROI is not good as budget (target). This will impact badly on the reward sta
accordingly. ???? (This will impact negatively on how the division and its staff are evaluated and and rewarded)
The manager of each division shall be demotivated since the division has to burne (bear) the uncontrollable cost.
Assessment on divisional performance may not be accurate.

Additional Comments Division manager may make investment decisions that are not benefical to the c
demotivated staff my lead to lower productivity and efficiency, decrease in prod

Marking Scheme possible marks

a) ROI Calculations
ROI for B 1 1
ROI for C 1 1

b) RI Calculations
RI for B 1.5 1.5
RI for C 1.5 1.5

c) discussion
ROI discussion 2 2
RI discussion 2 0
Old ROI calculation 1 1
Valid conclusion 1 1

d) new investment
ROI calculation 2 2
RI calculation 1 1
conclusion 2 0

e) behavioural issues
1 mark per valid point 4 3

Total 15
based on ROI, both performance are not well as expectation.

um respectively. However, the budgeted ROI per

perating profit
ficant and positive. This is due to using the lower rate
of 20%
EWER.
not well as expectation
crement) in operating profit but due to using net profit, which includes head office costs, to calculate ROI

% and 25% respectively. In comparing with ROI of last 3 months, such ROI
of B & C decrease, that not means that the performance of B & C are worst
ad office costs which are out of control of the company (division).
estment. You didn't answer
uld be less than before investment. So division director would decide not to invest in the new equipment

ed to the divisions. As a result,

pact badly on the reward staff
nd and rewarded)
uncontrollable cost.

hat are not benefical to the company as a whole

d efficiency, decrease in product quality and output