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Q183
Pro is a division of Mo and is an investment centre. The head office controls finance, HR and IT expenditure but all other decisions are devolved to the local centres.The statement of financial position for Pro shows net value of all assets and liabilities to be $4,500m at the start of the year and $4,890 at the end. It carries no debt itself although the group has debt liabilities.
The management accounts for income read as follows:
Revenue 3,500
Cost of sales 1,800
Local administration 250
IT costs 50
Distribution 80
Central administration 30
Interest charges 90
Net profit 1,200Ignore taxation.
What is the divisional ROI to the nearest % point? (1 d.p.)
[ ]%
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My answer was 28.0% (=1370/4890).
Kaplan answer is 30.4% (=1370/4500) without providing alternative answers.With regard to the value of assets employed, isn’t it advised to use either an average or a value as at the end of the period?
Your clarification would be much appreciated.You can usually expect in the exam to be told what value to use for the assets employed (at start of year, at end of year, or average – there are arguments for all of them).
However, if not told, then start of year net assets are the best to use on the basis that it is the assets at the start of the year that are most likely to have generated the profits for the year.
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