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We are asked to calculate net profit margin which is controllable by the export division manager? In this case depreciation is added back. My question is, if we were to appraise the division only and not the manager, would be deduct depreciation as it is controllable or leave it in if it had already been deducted ?
also, is it because export division is a profit centre and therefore has no control over depreciation since it does not invest? If we were appraising a division which was a profit centre, and not the divisional manager, would be still deduct depreciation in calculating net profit ? the paper is march jun 2017 ? thanks
When appraising the division you are looking at its performance as an economic entity, so the controllable question is not really relevant. If the division has good machinery it will benefit from that and should also account for depreciation. If the machinery is old and fully depreciated then the benefit will be less and so will the depreciation. Whether the local manager or head office is responsible for asset acquisition isn’t really relevant.
If the division were a revenue centre, this means the local manager is responsible for revenue only and depreciation would not be deducted. However, the concept of ‘revenue centre’ rather loses its meaning at corporate level where, ultimately everything is an investmemt centre feeding into corporate ROCE.
HTH
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