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32 Sports Co is a large manufacturing company specialising in the manufacture of a wide range of sports clothing and
equipment. The company has two divisions: Clothing (Division C) and Equipment (Division E). Each division operates
with little intervention from Head Office and divisional managers have autonomy to make decisions about long-term
investments.
Sports Co measures the performance of its divisions using return on investment (ROI), calculated using controllable
profit and average divisional net assets. The target ROI for each of the divisions is 18%. If the divisions meet or exceed
this target the divisional managers receive a bonus.
Last year, an investment which was expected to meet the target ROI was rejected by one of the divisional managers
because it would have reduced the division’s overall ROI. Consequently, Sports Co is considering the introduction of a
new performance measure, residual income (RI), in order to discourage this dysfunctional behaviour in the future. Like
ROI, this would be calculated using controllable profit and average divisional net assets.
The draft operating statement for the year, prepared by the company’s trainee accountant, is shown below:
Division C Division E
$’000 $’000
Sales revenue 3,800 8,400
Less variable costs (1,400 ) (3,030 )
–––––– ––––––
Contribution 2,400 5,370
Less fixed costs (945 ) (1,420 )
–––––– ––––––
Net profit 1,455 3,950
–––––– ––––––
Opening divisional controllable net assets 13,000 24,000
Closing divisional controllable net assets 9,000 30,000
Notes:
(1) Included in the fixed costs are depreciation costs of $165,000 and $460,000 for Divisions C and E respectively.
30% of the depreciation costs in each division relates to assets controlled but not owned by Head Office.
Division E invested $2m in plant and machinery at the beginning of the year, which is included in the net assets
figures above, and uses the reducing balance method to depreciate assets. Division C, which uses the straight-line
method, made no significant additions to non-current assets. It is the policy of both divisions to charge a full year’s
depreciation in the year of acquisition.
(2) Head Office recharges all of its costs to the two divisions. These have been included in the fixed costs and amount
to $620,000 for Division C and $700,000 for Division E.
(3) Sports Co has a cost of capital of 12%.
Required:
(a) (i) Calculate the return on investment (ROI) for each of the two divisions of Sports Co.answer
Net profit 1,455 3,950
Add back depreciation on non-controllable assets 49·5 138
Add back Head Office costs 620 700
–––––––– ––––––
Controllable profit 2,124·5 4,788i cant figure out how they got the depreciation figures.especially 138 if you can show me please. thank you
Please do not type out full questions. They are copyright of the ACCA and they get annoyed if they are posted elsewhere.
All you need to is say which exam (sep/dec 2017) and I can find it myself.The question says that 30% of the depreciation costs relate to assets controlled by head office. Therefore only 70% is controlled by the division and only this amount is relevant when calculating the ROI – the other 30% must therefore be added back to get the controllable profit. 30% x $165,000 = $49,500. 30% x $460,000 = $138,000.
Sir, you are a lifesaver thank you
i’ll make sure not to post the full Question again.
p.s. if i do all 11 past papers plus all section A from kaplan kit is it enough?
thanks sooo muchYou should do all of the questions in the Kaplan Kit – not just Section A 🙂
I assume also that you are studying before attempting questions? Our free lectures are a complete free course and cover everything needed to be able to pass the exam well.
Included in the fixed costs are depreciation costs of $165,000 and $460,000 for Divisions C
and E respectively. 30% of the depreciation costs in each division relates to assets controlled
but not owned by Head Office.—————————————————————————————————————————-
Sir, I understand how to derive controllable profits for each division. But I want to know whether the asset base would be reduced as well when calculating ROI. For example, 30% of Division C’s depreciation costs (which is $49,500) would have to be reduced from its closing asset figure since that portion of asset is controlled by head office rather than the Division C?
When calculating ROI (Return on Investment), the asset base is typically reduced by the portion of assets that are controlled by head office rather than the specific division.
In the example you provided, if 30% of Division C’s depreciation costs amount to $49,500, then that portion of the asset would indeed be reduced from Division C’s closing asset figure. This adjustment ensures that the ROI calculation reflects the division’s control and responsibility over its assets.
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