Mar/Jun 16 Q1 part iii – Flack supermarket

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May 21, 2017 at 7:29 am #387206
mochawing
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Hi Sir,
The question asks to assess the proposal to change the divisional performance measure”. Part of the answer is mentioning about not investing in refurbishing their stores which may reduce the depreciation charge that could make the operating profit higher, so that the manager is prioritising new store capital expenditure over the refurbishment. I’m unable to understand well on this and how it benefits to. Please help explain more on this. Thanks.
May 21, 2017 at 12:52 pm #387246
Ken Garrett
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If you have old assets they might be fully depreciated so no depreciation charge and that keeps profit higher. Renewing the assets will raise depreciation, yes pre-depreciation earnings are static.
New stores bring their own new profits.
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