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I am troubled with this question which was given in the examiner report sept 2018.
Example 1
Summary financial information for one of Damon Co’s divisions for the last year is shown below:—————————————————–$’000
Revenue—————————————-18,000
Variable costs———————————-(9,600)
Divisional fixed operating costs———–(2,760)
Apportioned head office costs————-(2,160)
Interest charges——————————–(200)
Tax————————————————-(700)
Net profit—————————————–2,580The average value of the division’s total assets less current liabilities for the last year was $22.8m.
Damon Co assesses the return on investment of its divisions on the basis of controllable profit.
Based on this information, what is the division’s return on investment for the last year?
A 11.3%
B 15.3%
C 20.8%
D 24.7%I know that we should only take costs controlled by the divisional manager and no costs controlled by the head office should be included.
BUT could you please explain whether the calculation of controllable profit is profit before interest and tax or net profit? Interest and tax are not relevant in paper PM?
HI
I GUESS CONTROLLABE PROFIT IS THE SAME LIKE OPERATING PROFIT.
AND OPRTATING PROFIT IS ALWAYS BEFORE INTEREST & TAX.
FURTHER IN CONTROLLABLE PROFIT, EXPENSES LIKE DEPRECIAION IS EXCLUDED AS SUCH EXPENSES ARE UNDER UNDER THE CONTROLL OF DEPARTMENTAL/DIVISIONAL MANAGER
mammaryasir: Please do not answer in this forum because it is the Ask the Tutor Forum, and you are not the tutor (but please do help people in the other Paper PM Forum.
Syed Ahsan Ali: We take the profit before interest and tax, because neither are controllable by the division manager.
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