# Divisional Performance Measurement Lecture

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In the context of ratio analysis, net profit means net operating profit which is profit before interest and tax.

(I know in financial accounts, net profit means profit after tax, but we are not doing financial accounts here )

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Oh. Thank you sir???? will keep that in mind next time

1. says

A company has capital employed of \$200,000. It has a cost of capital 12% per year. Its residual income is \$36,000.
What is the company’s return on investment?

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(In future please ask questions in the Ask the Tutor forum rather than as a comment on a lecture).

You know what the notional interest is (12% x \$200,000). You know what the residual income is, so you can add back the interest to get the profit.

The ROI is the profit as a percentage of the investment of 200,000.

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I got the answer: Profit 60,000.
Thank you so much sir

2. says

I was thinking about the problem of ROI vs RI.
Surely, the RI can be expressed as a percentage of net assets thereby allowing fair comparison between divisions?

in your example, you show 50,000 return on 400,000 net assets.
This generates an ROI of 12.5%
a 10% return would be 40,000
the RI would be 10,000
the RI as a percentage of net assets would be 2.5%, which is the 12.5% ROI less the desired 10% return

So this problem, one would imagine, is not as insurmountable as first suggested.

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What you have written is true. However, as far as the exam is concerned it is simply a question of appreciating that although ROI is by far the most common way of measuring performance and is the most obvious way, it can lead to a loss of goal congruence. RI avoids the loss of goal congruence problem. In practice there is no ‘rule’ as to how to approach measuring performance and a company could develop its own ‘rule’ – the exam is just expecting you to be aware of the problems and to be able to calculate ROI and RI.

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I understand

Its not so much the maths (although that is important), its the relative merits of each method – as you say, goal congruence!

3. says

Year ended oct 2003 Year ended oct 2004
Revenue \$ 5.75 Million \$ 6 Million
Number of styles 22 25
Net profit \$ 345,000 \$ 348,000
Market research cost \$ 200,000 \$ 150,000

Required: Calculate Increase in sales per \$ of market research.

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Capital budgeting is another name for investment appraisal, which is dealt with in Chapter 21 (and the lecture that goes with it).

There is no chapter in spreadsheets – the Course Notes are not Study Texts, they are notes that we use on courses. We do not teach spreadsheets on the courses because most students are familiar with them from work (and there are never many questions in the exam).

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Thank you sir, your lectures are just amazing.

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Thank you for the great lectures John. In Test Question 4, the answer indicates that the target rate of return = cost of finance. Are these two terms interchangeable? or is there a play in the question? If cost of finance means as it does [interest payable on an investment loan (?) ], shouldn’t we consider this a cost? which reduces the profit? Many thanks!

5. says

Hi John Moffat ..after really struggling to get a handle of MA2 , failing it in June ,to passing both Ma2 and Fma today in the CBE exam 70% in one and 64% in the other , it was all down to your fma lectures . Thank you so much !!!!

6. says

Thank you Mr John Moffat I got 74% in my CBE exam for F2 and was able to complete my CAT. Lookin forward for ACCA. Go lectures thanks to opentuition.

7. says

How we can distinguish in exam:
1. performance measurement – ROI or ROCE – (profit/capital employed)* 100% and
2.divisional performance measurement – also is ROI !!!! ( controllable profit/controllable investment) * 100%.
What they meant by investment ( I do not understand , exactly which figures will be , if we look at the balance sheet)