Is this the way controllable profit and net profit are calculated of a division?
Sales
less: cost of sales
Gross Profit
less: operating expenses
Controllable Profit
less: Costs controlled by head office
Net Profit / Final Profit
I have few questions related to ROI such as:
1) Net Profit is used to calculate the ROI of division so any costs controlled by the head office need to be deducted from controllable profit to get the net profit figures?
2) ROI is calculated for the performance of the divisional manager like thereof:
ROI = Net Profit / Investment x 100
3) Controllable Profit is used to calculate the ROI of the divisional manager so any costs controlled by the head office need to added back to net profit to get the controllable profit?
4) ROI is calculated for the performance of the divisional manager like thereof:
ROI = Controllable profit / Investment x 100
Thank you.
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Return on investment
3y ago#1The controllable profit is the profit when ignoring all expenses that are controlled by the head office.
1. Yes
2. No. If it is the performance of the manager that is being measured then it is the controllable profit that is used and not the final net profit.
3. Correct.
4. Correct.
Sorry I did a mistake in my previous question. This is what I wanted to ask.
1) We cannot say which is the controllable profit by simply looking at the profit statement given in the question until we have additional information and we use that to take only costs controlled by manager and remove all the costs controlled by the head office. (correct?)
2) ROI is calculated for the performance of the division like thereof:
ROI = Net Profit / Investment x 100
Could you please respond to my questions above. I would be glad.
3y ago#4Yes, it is correct.
(I do not know why you posted your second post. Maybe it was to try and rush me into answering. I do not sit permanently at the computer, but I always reply within 24 hours!)
Sorry to ask again.
Sport Co question (december 2017) ask us to calculate the ROI for the two divisions but the examiner has used controllable profit to measure the performance of the division even though you confirmed when I asked you above that net profit (final profit) must be used to measure the performance of the division?
Could u please tell me WHY?
Similarly in other questions too where the examiner is using controllable profit for ROI irrespective whether we have to measure the performance of divison or manager.
3y ago#6Because the question specifically asks for the controllable profit to be used, and explains why this is to be the case in the first three paragraphs of the question.
The whole nature of the exam is to test your ability to be practical as opposed to purely learning rules.
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