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Hello,
Please, explain why for EVA calculation they use operating profit as a starting point? Is it because the division cannot control head office expenses?
I used profit before tax as a starting point and my EVA= (301-90.3+4)-(1294*9%)=98.2$ Would is still get marks for this?
That’s right – the apportioned head office costs relate to HO not the division. In particular, the board’s concern is that they want to assess the performance of the manager The same argument would apply to ROI and RI.
You would get some marks for technique eg adding back non-cash expenses and taking of the charge for capital. At least half marks I would think.
Dear Tutor,
In studying divisional performance, a distinction is always made between managerial performance and divisional performance. In some instances, the gross margin is used to evaluate the value chain, which is still part of managerial performance.
Whereas the case study makes reference to managerial performance being the board’s main concern, the requirement is the evaluation of divisional performance.
In simple English, the board is of the view that ROI does not measure managerial performance and they are thinking of using RI or EVA. On the other hand, divisional performance cannot be ignored completely because divisional performance is still being compared.
In a worst case scenario, I would have expected the solution to have calculated both managerial and divisional performance for all three measures, to illustrate the element controllability. However, all the calculations, except for ROI, are based on managerial performance. Strangely, the narrative part of the solution makes nominal reference to managerial performance.
In almost all the exam preparations, we are advised to answer what is asked. Divisional performance in this case.
This is just a trick to fail students!!
They don’t try to trick students – the pass rate in P5 is low enough already.
You are right to try to distinguish managerial from divisional performance however that distinction is often hard to make in calculations: exactly what is the manager responsible for and what has been inherited? For example, a shop could have a normal rent but be in a bad location. What adjustment shoudl be made for the managers of that shop if he/she had no say in acquiring the lease and it is difficult to get rid of it?
You would have done fine using the approach you have suggested. They would be delighted for you to show you understood that dividional performance and managerial performance are different.
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