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Sir ,should depreciation be always deducted from capital employed? In BPP kit there’s one solution where it was deducted at year end total investment, but in another situation-based question the depreciation from a new asset only got deducted from profit and not from Capital employed, even though they said to find Annual ROI (specifically Qs.324 Biscuits and Cakes).
If a new machine is bought and we are to find the ROI and RI should we or should we not deduct depreciation from Capital employed??This is very confusing to me..
This is the relevant part of the question..
The company has a cost of capital of 10%.
The budgeted operating statement for the month of July is shown below:
B C
$’000 $’000
Sales revenue 1,300 1,500
Less variable costs (700) (800)
Contribution 600 700
Less controllable fixed costs (134) (228)
Controllable profit 466 472
Less apportionment of head office costs (155) (180)
Net profit 311 292
Divisional net assets $23.2m $22.6mDivision B has now been offered an immediate opportunity to invest in new machinery at a cost of $2.12 million.
The machinery is expected to have a useful economic life of four years, after which it could be sold for $200,000.
Division B’s policy is to depreciate all of its machinery on a straight-line basis over the life of the asset. The
machinery would be expected to expand Division B’s production capacity, resulting in an 8.5% increase in
contribution per month.Recalculate ROI and RI..
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