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Can you please help me with the following.
Net value of assets and liabilities – 4500m at the start and 4890m at the end. No debts but it has debt liabilities.Revenue – 3500m
Cost of sales – 1800 m
Local administration – 250 m
IT costs – 50m
Distribution – 80m
Central administraion – 30m
Iterest charges – 90m
Net profit – 1200 m
Ignore taxationCost of capital – 12%
Workings:
Controllable profit is 1200+90+30+50 = 1370 m
What is this -controllable profit?Notional interest charge at 12% (4500*.12) = 540m
I know only this formula= (Sales * operationg profit margin) – (capital required for project * Cost of capital) OR Profit – notional interest at target return on amount invested…
why do we use this 4500 asset at start of year?..RI = 830 m
Thank you very much
You only measure the performance of the manager on what the manager controls.
Therefore it is the operating profit adjusted for the central admin and the IT, which are not controlled by the divisional manager.RI always equals controllable profit less the notional interest charge.
There is no real rule as to whether to use opening value or closing value – it is up to the management to decide. However for the exam, if you have the opening value then use that because it is the opening value that will have earned the profit for the year.
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