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1) Can you please clarify whether do I have to deduct depreciation n head office cost to get to the controllable profit for ROI calculation?
2) Is it also true that for RI calculation we have to use profit before tax and for that, we have to deduct depreciation n head office cost?
I’m confused about when to deduct or add the depreciation n head office cost in both ratios calculations! These are questions that I simply like to ask you humbly. Please answer them. I’ll appreciate it.
Actually, I have seen ur lecture but you mentioned controllable profit there which is (I suppose) operating profit if I am correct.
1. For the controllable profit we ignore any expenses that are not under the control of the division (i.e. are determined by head office). So the recharge of head office costs is ignored (because they are not controlled by the division). Depreciation is ignored if it is head office who decides what non-current assets are held by the division.
2. The same rules applies for both RI and ROI as regards head office costs. Tax is not relevant because divisions do not pay tax (it is the company as a whole that pays any tax).
1) You said that ‘any expenses that are not under the control, we simply ignore them’ but, if they are under the control of the division then, you’ll agree with me that we’ve to deduct depreciation n head office cost to reach the OPERATING PROFIT bcoz operating expenses [where depreciation n head office are taken to] are minus from gross profit to get operating profit.
There are MCQs in Kaplan which states that controllable profit is profit after depreciation?
2) What I asked you in the second question whether controllable profit is considered profit before tax or profit before interest & tax in RI calculation and the same deduction about depreciation n head office cost is applied there too [as profit after depreciation] if they are in control of division?
Correct me if i am wrong at some point.
Thanks for your help SIR 🙂
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