- October 22, 2022 at 11:05 am #669634Isabella1Participant
- Topics: 44
- Replies: 23
A and B are two divisions of a large company that operate in similar markets. The divisions are treated as investment centers and every month they each prepare an operating statement to be submitted to the parent company. Operating statements for these two divisions for October are shown below:
Operating statements for October
Less variable costs
Less controllable fixed costs (includes depreciation on divisional assets)
Less apportioned central costs:
Net Income before tax
Total divisional net assets
The company currently has a target return on capital of 12% per annum. However, the company believes its cost of capital is likely to rise and is considering increasing the target return on capital. At present the performance of each division and the divisional management are assessed primarily on the basis of Return on investment (ROI).
Calculate the annualized Return on investment (ROI) for divisions A and B
Calculate the annualized Residual Income (RI) for divisions A and B.
Hello, John, I am sorry that asking my personal tutor question here but I can have only you for my solutions. Please help me in this. Actually, I took Controllable Income in my calculations as I thought it would be more relevant to evaluate performance of divisional managers. My tutor said it is wrong, it is better to take Total Net Income as the question has not asked anything like controllable or uncontrollable. I am not much convinced with this reason.
Can you tell we what is correct to do here? Thank you.October 22, 2022 at 4:07 pm #669649John MoffatKeymaster
- Topics: 56
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Your tutor is correct. You would only use the controllable profit if either that was specified in the question, or it was the managers performance that was being measured (as opposed to that of the division).
I assume that you have a Revision Kit from one of the ACCA Approved Publishers in which case it should contain a question called Biscuits and Caked (form the Jun 2012 exam) which is similar to the question you have typed out 🙂
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