The following scenario relates to questions 1 – 5.

Scenario

Cherry Co has two independent divisions, A and B. Division A produces product X. B is a new division which produces product Y. It requires units of product X to produce product Y. Last year, A sold X exclusively to the external market. Management at Cherry Co did not wish to disrupt the operations of A as B was an experimental division. However, due to the success of product Y, B is now a permanent division of Cherry Co. Management wants A to provide at least some units of product X to B.

The table below shows the contribution margin for each division when B purchases X from an outside supplier.

REQUIREMENT

What would the minimum transfer price per unit of product X be if A sold 12,000 units of X, assuming that A has capacity for 15,000 units?

$ _____ (e.g. 1000)

Note. You are not required to put $ sign nor any coma. (e.g. 1000)

The following scenario relates to questions 1 – 5.

Scenario

Cherry Co has two independent divisions, A and B. Division A produces product X. B is a new division which produces product Y. It requires units of product X to produce product Y. Last year, A sold X exclusively to the external market. Management at Cherry Co did not wish to disrupt the operations of A as B was an experimental division. However, due to the success of product Y, B is now a permanent division of Cherry Co. Management wants A to provide at least some units of product X to B.

The table below shows the contribution margin for each division when B purchases X from an outside supplier.

REQUIREMENT

If there was no external market for product X, which of the following approaches could be used to negotiate a transfer price?

The following scenario relates to questions 1 – 5.

Scenario

Cherry Co has two independent divisions, A and B. Division A produces product X. B is a new division which produces product Y. It requires units of product X to produce product Y. Last year, A sold X exclusively to the external market. Management at Cherry Co did not wish to disrupt the operations of A as B was an experimental division. However, due to the success of product Y, B is now a permanent division of Cherry Co. Management wants A to provide at least some units of product X to B.

The table below shows the contribution margin for each division when B purchases X from an outside supplier.

REQUIREMENT

What would the minimum transfer price per unit of product X be if A sold 12,000 units of X, assuming that A has no spare capacity?

The following scenario relates to questions 1 – 5.

Scenario

Cherry Co has two independent divisions, A and B. Division A produces product X. B is a new division which produces product Y. It requires units of product X to produce product Y. Last year, A sold X exclusively to the external market. Management at Cherry Co did not wish to disrupt the operations of A as B was an experimental division. However, due to the success of product Y, B is now a permanent division of Cherry Co. Management wants A to provide at least some units of product X to B.

The table below shows the contribution margin for each division when B purchases X from an outside supplier.

REQUIREMENT

Are the following two statements about Cherry Co true or false?

1. Cherry Co's transfer pricing system should seek to establish a transfer price for X that will provide an incentive for the managers of A and B to make and sell quantities of products that will maximise sales of Product Y.
2. The manager of division B is likely to be more motivated if she is given freedom in which to operate and is able to purchase from outside suppliers if prices are cheaper.

The following scenario relates to questions 1 – 5.

Scenario

Cherry Co has two independent divisions, A and B. Division A produces product X. B is a new division which produces product Y. It requires units of product X to produce product Y. Last year, A sold X exclusively to the external market. Management at Cherry Co did not wish to disrupt the operations of A as B was an experimental division. However, due to the success of product Y, B is now a permanent division of Cherry Co. Management wants A to provide at least some units of product X to B.

The table below shows the contribution margin for each division when B purchases X from an outside supplier.

REQUIREMENT

Are the following statements about Cherry Co true or false?

1. The performance of the managers of A and B will be easier to assess in an environment in which managers are able to control greater elements of the business.
2. In a competitive market, it is likely that suppliers will offer product X to Division B significantly cheaper than Division A can, for a sustained period of time.

The following scenario relates to questions 1 – 5.

Scenario

Jamair is one of a growing number of low-cost airlines in the country of Shania.

Jamair's strategy is to operate as a low-cost, high-efficiency airline.

The airline was given an 'on time arrival' ranking of seventh best by the country's aviation authority, which ranks all 50 of the country's airlines based on the number of flights which arrive on time at their destinations.

The average 'ground turnaround time' for airlines in Shania is 50 minutes, meaning that, on average, planes are on the ground for cleaning, refuelling, etc for 50 minutes before departing again.

The number of passengers carried by the airline has grown from 300,000 passengers on a total of 3,428 flights in 2007 to 920,000 passengers on 7,650 flights in 2013.

The overall growth of the airline has been helped by the limited route licensing policy of the Shanian government, which has given Jamair almost monopoly status on some of its routes.
However, the government is now set to change this policy with almost immediate effect, and it has become more important than ever to monitor performance effectively.

REQUIREMENT

The following performance objective has been suggested for Jamair:

Increase seat revenue per plane

To which perspective of the balanced scorecard does this objective belong?

The following scenario relates to questions 1 – 5.

Scenario

Jamair is one of a growing number of low-cost airlines in the country of Shania.

Jamair's strategy is to operate as a low-cost, high-efficiency airline.

The airline was given an 'on time arrival' ranking of seventh best by the country's aviation authority, which ranks all 50 of the country's airlines based on the number of flights which arrive on time at their destinations.

The average 'ground turnaround time' for airlines in Shania is 50 minutes, meaning that, on average, planes are on the ground for cleaning, refuelling, etc for 50 minutes before departing again.

The number of passengers carried by the airline has grown from 300,000 passengers on a total of 3,428 flights in 2007 to 920,000 passengers on 7,650 flights in 2013.

The overall growth of the airline has been helped by the limited route licensing policy of the Shanian government, which has given Jamair almost monopoly status on some of its routes.
However, the government is now set to change this policy with almost immediate effect, and it has become more important than ever to monitor performance effectively.

REQUIREMENT

Are the following statements about Jamair's performance measurement system true or false?

1. When performance is not quantified, it is difficult to target and monitor.
2. Jamair is more likely to have a reliable and comprehensive system for collecting data about qualitative aspects of performance than a well-established system for measuring quantitative data.

The following scenario relates to questions 1 – 5.

Scenario

Jamair is one of a growing number of low-cost airlines in the country of Shania.

Jamair's strategy is to operate as a low-cost, high-efficiency airline.

The airline was given an 'on time arrival' ranking of seventh best by the country's aviation authority, which ranks all 50 of the country's airlines based on the number of flights which arrive on time at their destinations.

The average 'ground turnaround time' for airlines in Shania is 50 minutes, meaning that, on average, planes are on the ground for cleaning, refuelling, etc for 50 minutes before departing again.

The number of passengers carried by the airline has grown from 300,000 passengers on a total of 3,428 flights in 2007 to 920,000 passengers on 7,650 flights in 2013.

The overall growth of the airline has been helped by the limited route licensing policy of the Shanian government, which has given Jamair almost monopoly status on some of its routes.
However, the government is now set to change this policy with almost immediate effect, and it has become more important than ever to monitor performance effectively.

REQUIREMENT

The ___________ perspective considers whether the management in Jamair meets the expectations of its shareholders and how it creates value for them.

Which of the following words is missing from the above statement?

The following scenario relates to questions 1 – 5.

Scenario

Jamair is one of a growing number of low-cost airlines in the country of Shania.

Jamair's strategy is to operate as a low-cost, high-efficiency airline.

The airline was given an 'on time arrival' ranking of seventh best by the country's aviation authority, which ranks all 50 of the country's airlines based on the number of flights which arrive on time at their destinations.

The average 'ground turnaround time' for airlines in Shania is 50 minutes, meaning that, on average, planes are on the ground for cleaning, refuelling, etc for 50 minutes before departing again.

The number of passengers carried by the airline has grown from 300,000 passengers on a total of 3,428 flights in 2007 to 920,000 passengers on 7,650 flights in 2013.

The overall growth of the airline has been helped by the limited route licensing policy of the Shanian government, which has given Jamair almost monopoly status on some of its routes.
However, the government is now set to change this policy with almost immediate effect, and it has become more important than ever to monitor performance effectively.

REQUIREMENT

The following performance measure has been suggested for Jamair:

Improve on the 'on time arrival' ranking of seventh best in the country's aviation authority ratings.

To which perspective of the balanced scorecard does this measure belong?

The following scenario relates to questions 1 – 5.

Scenario

Jamair is one of a growing number of low-cost airlines in the country of Shania.

Jamair's strategy is to operate as a low-cost, high-efficiency airline.

The airline was given an 'on time arrival' ranking of seventh best by the country's aviation authority, which ranks all 50 of the country's airlines based on the number of flights which arrive on time at their destinations.

The average 'ground turnaround time' for airlines in Shania is 50 minutes, meaning that, on average, planes are on the ground for cleaning, refuelling, etc for 50 minutes before departing again.

The number of passengers carried by the airline has grown from 300,000 passengers on a total of 3,428 flights in 2007 to 920,000 passengers on 7,650 flights in 2013.

The overall growth of the airline has been helped by the limited route licensing policy of the Shanian government, which has given Jamair almost monopoly status on some of its routes.
However, the government is now set to change this policy with almost immediate effect, and it has become more important than ever to monitor performance effectively.

REQUIREMENT

The following performance objective has been suggested for Jamair:

Improve the turnaround time on the ground

To which perspective of the balanced scorecard does this objective belong?

The following scenario relates to questions 1 – 5.

Scenario

Kingfisher is an investment centre within Stickleback Co. Kingfisher has an operating profit of $30,000, and operating assets of $150,000. The cost of capital is 15%. There is a proposed investment of $15,000 which will increase the operating income by $1,900.

REQUIREMENT

What is the residual income (RI) for Kingfisher with and without the proposed investment?

The following scenario relates to questions 1 – 5.

Scenario

Kingfisher is an investment centre within Stickleback Co. Kingfisher has an operating profit of $30,000, and operating assets of $150,000. The cost of capital is 15%. There is a proposed investment of $15,000 which will increase the operating income by $1,900.

REQUIREMENT

What is the return on investment (ROI) for Kingfisher with and without the proposed investment?

The following scenario relates to questions 1 – 5.

Scenario

Kingfisher is an investment centre within Stickleback Co. Kingfisher has an operating profit of $30,000, and operating assets of $150,000. The cost of capital is 15%. There is a proposed investment of $15,000 which will increase the operating income by $1,900.

REQUIREMENT

The following statements have been made about Stickleback Co's divisionalised structure.

1. There is a danger that managers in the divisions may use their decision-making freedom to make decisions that are not in the best interests of the overall company.
2. Stickleback Co's top management must have involvement in the day-to-day operations of the divisions.

Which of the above statements is/are correct?

The following scenario relates to questions 1 – 5.

Scenario

Kingfisher is an investment centre within Stickleback Co. Kingfisher has an operating profit of $30,000, and operating assets of $150,000. The cost of capital is 15%. There is a proposed investment of $15,000 which will increase the operating income by $1,900.

REQUIREMENT

The following statements have been made about the use of ROI as a performance measure in Stickleback Co.

1. If a manager's performance is being evaluated, a portion of head office assets should be included in the calculation of ROI in Stickleback Co's investment centres.
2. It may lead to short termism.

Which of the above statements is/are correct?

The following scenario relates to questions 1 – 5.

Scenario

Kingfisher is an investment centre within Stickleback Co. Kingfisher has an operating profit of $30,000, and operating assets of $150,000. The cost of capital is 15%. There is a proposed investment of $15,000 which will increase the operating income by $1,900.

REQUIREMENT

The divisional manager for Kingfisher wants to increase the ROI for the next period.

Which TWO of the following options would increase the ROI?

The following scenario relates to questions 1 – 5.

Scenario

Squarize is a large company which started as a pay-TV broadcaster and then started offering broadband and telephone services to its pay-TV customers. Customers could take advantage of discounts for 'bundle' packages of all three services.

All contracts to customers of Squarize are for a minimum three-month period. The pay-TV box is sold to the customer at the beginning of the contract; however, the broadband and telephone equipment is only rented to them.

In the first few years after product bundling was introduced, the company saw a steady increase in profits. Then, Squarize saw its revenues and operating profits fall. Several reasons were identified for the deterioration of results:

1. In a bid to save cash, many pay-TV customers were cancelling their contracts after the minimum three-month period as they were then able to keep the pay-TV box. The box comes with a number of free channels, which the customer can continue to receive free of charge, even after the cancellation of their contract.
2. Some bundle customers found that the broadband service that they had subscribed to did not work. As a result, they were immediately cancelling their contracts for all services within the 14-day cancellation period permitted under the contracts.

In a response to the above problems and in an attempt to increase revenues and profits, Squarize made the following changes to the business:

1. It made a strategic decision to withdraw the bundle package from the market and, instead, offer each service as a standalone product.
2. It investigated and resolved the problem with customers' broadband service.

It is now one year since the changes were made and the finance director wants to use a balanced scorecard to assess the extent to which the changes have been successful in improving the performance of the business.

REQUIREMENT

Which of the following would be the most suitable measure of performance from the innovation and learning perspective in Squarize's balanced scorecard?

The following scenario relates to questions 1 – 5.

Scenario

Squarize is a large company which started as a pay-TV broadcaster and then started offering broadband and telephone services to its pay-TV customers. Customers could take advantage of discounts for 'bundle' packages of all three services.

All contracts to customers of Squarize are for a minimum three-month period. The pay-TV box is sold to the customer at the beginning of the contract; however, the broadband and telephone equipment is only rented to them.

In the first few years after product bundling was introduced, the company saw a steady increase in profits. Then, Squarize saw its revenues and operating profits fall. Several reasons were identified for the deterioration of results:

1. In a bid to save cash, many pay-TV customers were cancelling their contracts after the minimum three-month period as they were then able to keep the pay-TV box. The box comes with a number of free channels, which the customer can continue to receive free of charge, even after the cancellation of their contract.
2. Some bundle customers found that the broadband service that they had subscribed to did not work. As a result, they were immediately cancelling their contracts for all services within the 14-day cancellation period permitted under the contracts.

In a response to the above problems and in an attempt to increase revenues and profits, Squarize made the following changes to the business:

1. It made a strategic decision to withdraw the bundle package from the market and, instead, offer each service as a standalone product.
2. It investigated and resolved the problem with customers' broadband service.

It is now one year since the changes were made and the finance director wants to use a balanced scorecard to assess the extent to which the changes have been successful in improving the performance of the business.

REQUIREMENT

The following performance objective has been suggested for Squarize:

Reduce the number of contracts cancelled due to the broadband service not working

To which perspective of the balanced scorecard does this objective belong?

The following scenario relates to questions 1 – 5.

Scenario

Squarize is a large company which started as a pay-TV broadcaster and then started offering broadband and telephone services to its pay-TV customers. Customers could take advantage of discounts for 'bundle' packages of all three services.

All contracts to customers of Squarize are for a minimum three-month period. The pay-TV box is sold to the customer at the beginning of the contract; however, the broadband and telephone equipment is only rented to them.

In the first few years after product bundling was introduced, the company saw a steady increase in profits. Then, Squarize saw its revenues and operating profits fall. Several reasons were identified for the deterioration of results:

1. In a bid to save cash, many pay-TV customers were cancelling their contracts after the minimum three-month period as they were then able to keep the pay-TV box. The box comes with a number of free channels, which the customer can continue to receive free of charge, even after the cancellation of their contract.
2. Some bundle customers found that the broadband service that they had subscribed to did not work. As a result, they were immediately cancelling their contracts for all services within the 14-day cancellation period permitted under the contracts.

In a response to the above problems and in an attempt to increase revenues and profits, Squarize made the following changes to the business:

1. It made a strategic decision to withdraw the bundle package from the market and, instead, offer each service as a standalone product.
2. It investigated and resolved the problem with customers' broadband service.

It is now one year since the changes were made and the finance director wants to use a balanced scorecard to assess the extent to which the changes have been successful in improving the performance of the business.

REQUIREMENT

Squarize has been advised that it could also use the Fitzgerald and Moon building block model to attempt to overcome the problems associated with performance measurement of service businesses.

Which of the following is not a building block included in this performance management system?

The following scenario relates to questions 1 – 5.

Scenario

Squarize is a large company which started as a pay-TV broadcaster and then started offering broadband and telephone services to its pay-TV customers. Customers could take advantage of discounts for 'bundle' packages of all three services.

All contracts to customers of Squarize are for a minimum three-month period. The pay-TV box is sold to the customer at the beginning of the contract; however, the broadband and telephone equipment is only rented to them.

In the first few years after product bundling was introduced, the company saw a steady increase in profits. Then, Squarize saw its revenues and operating profits fall. Several reasons were identified for the deterioration of results:

1. In a bid to save cash, many pay-TV customers were cancelling their contracts after the minimum three-month period as they were then able to keep the pay-TV box. The box comes with a number of free channels, which the customer can continue to receive free of charge, even after the cancellation of their contract.
2. Some bundle customers found that the broadband service that they had subscribed to did not work. As a result, they were immediately cancelling their contracts for all services within the 14-day cancellation period permitted under the contracts.

In a response to the above problems and in an attempt to increase revenues and profits, Squarize made the following changes to the business:

1. It made a strategic decision to withdraw the bundle package from the market and, instead, offer each service as a standalone product.
2. It investigated and resolved the problem with customers' broadband service.

It is now one year since the changes were made and the finance director wants to use a balanced scorecard to assess the extent to which the changes have been successful in improving the performance of the business.

REQUIREMENT

The following performance measure has been suggested for Squarize:

Volume of sales to new customers for each product/service

To which perspective of the balanced scorecard does this measure belong?

The following scenario relates to questions 1 – 5.

Scenario

Squarize is a large company which started as a pay-TV broadcaster and then started offering broadband and telephone services to its pay-TV customers. Customers could take advantage of discounts for 'bundle' packages of all three services.

All contracts to customers of Squarize are for a minimum three-month period. The pay-TV box is sold to the customer at the beginning of the contract; however, the broadband and telephone equipment is only rented to them.

In the first few years after product bundling was introduced, the company saw a steady increase in profits. Then, Squarize saw its revenues and operating profits fall. Several reasons were identified for the deterioration of results:

1. In a bid to save cash, many pay-TV customers were cancelling their contracts after the minimum three-month period as they were then able to keep the pay-TV box. The box comes with a number of free channels, which the customer can continue to receive free of charge, even after the cancellation of their contract.
2. Some bundle customers found that the broadband service that they had subscribed to did not work. As a result, they were immediately cancelling their contracts for all services within the 14-day cancellation period permitted under the contracts.

In a response to the above problems and in an attempt to increase revenues and profits, Squarize made the following changes to the business:

1. It made a strategic decision to withdraw the bundle package from the market and, instead, offer each service as a standalone product.
2. It investigated and resolved the problem with customers' broadband service.

It is now one year since the changes were made and the finance director wants to use a balanced scorecard to assess the extent to which the changes have been successful in improving the performance of the business.

REQUIREMENT

Which of the following is most likely to be used as a measure of performance from the customer perspective in Squarize's balanced scorecard?

The following scenario relates to questions 1 – 5.

Scenario

An investment centre with capital employed of $750,000 is budgeted to earn a profit of $200,000 next year. A proposed non-current asset investment of $125,000, not included in the budget at present, will earn a profit next year of $20,000. The company's cost of capital is 15%.

REQUIREMENT

Are the following statements about the use of ROI in Alder Co true or false?

1. If a manager's performance is being evaluated, a portion of head office assets should be included in the calculation of ROI in Alder Co's investment centres.
2. If the performance of the investment centre is being appraised, head office assets or investment centre assets controlled by head office should not be included in the calculation of ROI.

The following scenario relates to questions 1 – 5.

Scenario

An investment centre with capital employed of $750,000 is budgeted to earn a profit of $200,000 next year. A proposed non-current asset investment of $125,000, not included in the budget at present, will earn a profit next year of $20,000. The company's cost of capital is 15%.

REQUIREMENT

Are the following statements about the divisionalised structure in Alder Co true or false?

1. The authority to act to improve performance motivates the divisional managers in Alder Co, more so than if the company was centralised.
2. Alder Co's top management must have involvement in the day-to-day operations of Alder Co.

The following scenario relates to questions 1 – 5.

Scenario

An investment centre with capital employed of $750,000 is budgeted to earn a profit of $200,000 next year. A proposed non-current asset investment of $125,000, not included in the budget at present, will earn a profit next year of $20,000. The company's cost of capital is 15%.

REQUIREMENT

Are the following statements about the use of ROI in Alder Co true or false?

1. The profit figure for ROI should always be the amount before any interest is charged.
2. The asset base of the ratio can be altered by increasing/decreasing payables and receivables (by speeding up or delaying payments and receipts).

The following scenario relates to questions 1 – 5.

Scenario

An investment centre with capital employed of $750,000 is budgeted to earn a profit of $200,000 next year. A proposed non-current asset investment of $125,000, not included in the budget at present, will earn a profit next year of $20,000. The company's cost of capital is 15%.

REQUIREMENT

What is the budgeted ROI for next year, both before and after the investment is made (to the nearest %)? (e.g. 1000)

The following scenario relates to questions 1 – 5.

Scenario

An investment centre with capital employed of $750,000 is budgeted to earn a profit of $200,000 next year. A proposed non-current asset investment of $125,000, not included in the budget at present, will earn a profit next year of $20,000. The company's cost of capital is 15%.

REQUIREMENT

What is the residual income for next year, both before and after the investment is made?

The following scenario relates to questions 1 – 5.

Scenario

An investment centre in Apple Co generates a profit of $24,000. You have been given the following additional information about the investment centre.

REQUIREMENT

Apple Co has two divisions which are set to begin buying and selling a product between themselves. It has been suggested that a cost-based approach to transfer pricing be used.

Are the following statements about this suggestion true or false?

1. A cost-based approach is suitable for Apple Co in this scenario if there is no external market for the product that is being transferred.
2. A cost-based approach is suitable for Apple Co in this scenario if an imperfect market exists.

The following scenario relates to questions 1 – 5.

Scenario

An investment centre in Apple Co generates a profit of $24,000. You have been given the following additional information about the investment centre.

REQUIREMENT

Apple Co operates a transfer pricing system between two divisions based on market price.

Are the following statements about this true or false?

1. The market price acts as an incentive to use up any spare capacity in the selling division of Apple Co.
2. Using the market price as the transfer price encourages selling and buying decisions which appear to be in the best interests of the division's performance. This leads to the company as a whole achieving optimal results as each division optimises its performance.

The following scenario relates to questions 1 – 5.

Scenario

An investment centre in Apple Co generates a profit of $24,000. You have been given the following additional information about the investment centre.

REQUIREMENT

What is the ROI for the investment centre? (to the nearest %) (e.g. 1000)

The following scenario relates to questions 1 – 5.

Scenario

An investment centre in Apple Co generates a profit of $24,000. You have been given the following additional information about the investment centre.

REQUIREMENT

An investment in a non-current asset could be made which would result in a capital employed figure of $100,000. The investment would result in a new profit figure of $35,000 for the division.

If the investment is made, what would the residual income be for the investment centre if the cost of capital is 12%?

Note. You are not required to put $ sign nor any coma. (e.g. 1000)

The following scenario relates to questions 1 – 5.

Scenario

An investment centre in Apple Co generates a profit of $24,000. You have been given the following additional information about the investment centre.

REQUIREMENT

Are the following statements about the use of different performance measures in Apple Co true or false?

1. Residual income is more flexible, since a different cost of capital can be applied to investments with different risk characteristics.
2. Residual income does not facilitate comparisons between investment centres.

The following scenario relates to questions 1 – 5.

Scenario

Box Co has an operating profit of $20,000, and operating assets of $95,000. The cost of capital is 12%. There is a proposed investment of $10,000 which will increase the operating profit by $1,400.

REQUIREMENT

One of the managers in Box Co is critical of the performance measures used. She has said that they are too focused on financial performance and do not take into account any non-financial performance measures.

Are the following statements she has made true or false?

1. Financial performance measures do not necessarily provide sufficient information about ongoing problems with product quality. As a result, there is little attention paid to the generation of information on quality in Box Co.
2. Non-financial performance indicators can give a better indication of future prospects.

The following scenario relates to questions 1 – 5.

Scenario

Box Co has an operating profit of $20,000, and operating assets of $95,000. The cost of capital is 12%. There is a proposed investment of $10,000 which will increase the operating profit by $1,400.

REQUIREMENT

What is the RI with and without the proposed investment?

The following scenario relates to questions 1 – 5.

Scenario

Box Co has an operating profit of $20,000, and operating assets of $95,000. The cost of capital is 12%. There is a proposed investment of $10,000 which will increase the operating profit by $1,400.

REQUIREMENT

Are the following statements about Box Co's divisionalised structure true or false?

1. There is a danger that managers in Box Co may use their decision-making freedom to make decisions that are not in the best interests of the overall company.
2. A good performance measure for the divisional managers in Box Co should include a portion of head office costs in the calculations.

The following scenario relates to questions 1 – 5.

Scenario

Box Co has an operating profit of $20,000, and operating assets of $95,000. The cost of capital is 12%. There is a proposed investment of $10,000 which will increase the operating profit by $1,400.

REQUIREMENT

What is the ROI with and without the proposed investment? (to one decimal point)

The following scenario relates to questions 1 – 5.

Scenario

Box Co has an operating profit of $20,000, and operating assets of $95,000. The cost of capital is 12%. There is a proposed investment of $10,000 which will increase the operating profit by $1,400.

REQUIREMENT

Which of the following methods would encourage the managers of Box Co to take a short-term view?

The following scenario relates to questions 1 – 5.

Scenario

An investment centre with capital employed of $600,000 is budgeted to earn a profit of $100,000 next year. A proposed fixed asset investment of $150,000, not included in the budget at present, will earn a profit next year of $23,000 after depreciation. The company's cost of capital is 13%.

REQUIREMENT

Manager 2 wishes to use ROI as a performance measure.

Which of the following reasons is a valid reason for Willow Co choosing to use ROI and not RI?

The following scenario relates to questions 1 – 5.

Scenario

An investment centre with capital employed of $600,000 is budgeted to earn a profit of $100,000 next year. A proposed fixed asset investment of $150,000, not included in the budget at present, will earn a profit next year of $23,000 after depreciation. The company's cost of capital is 13%.

REQUIREMENT

What is the budgeted return on investment (ROI) for next year, both before and after the investment is made (to the nearest %)? (e.g. 1000)

The following scenario relates to questions 1 – 5.

Scenario

An investment centre with capital employed of $600,000 is budgeted to earn a profit of $100,000 next year. A proposed fixed asset investment of $150,000, not included in the budget at present, will earn a profit next year of $23,000 after depreciation. The company's cost of capital is 13%.

REQUIREMENT

Two of the divisional managers in Willow Co disagree on the performance measure which should be used to determine their bonus for the year. Manager 1 is the manager of a large division, while manager 2 is manager of a small division. Manager 1 prefers to use residual income and has given the following examples of limitations of ROI to support this decision.

Which of the following is a valid reason for Willow Co choosing to use RI and not ROI?

The following scenario relates to questions 1 – 5.

Scenario

An investment centre with capital employed of $600,000 is budgeted to earn a profit of $100,000 next year. A proposed fixed asset investment of $150,000, not included in the budget at present, will earn a profit next year of $23,000 after depreciation. The company's cost of capital is 13%.

REQUIREMENT

Due to its size, Willow Co operates a divisionalised structure. One of the manager's area of responsibility is 'decisions over costs, revenues, and assets'. The typical financial performance measures used by this manager is return on investment and residual income.

Which of the following centres best describes the manager's responsibility area?

The following scenario relates to questions 1 – 5.

Scenario

An investment centre with capital employed of $600,000 is budgeted to earn a profit of $100,000 next year. A proposed fixed asset investment of $150,000, not included in the budget at present, will earn a profit next year of $23,000 after depreciation. The company's cost of capital is 13%.

REQUIREMENT

What is the residual income (RI) for next year, both before and after the investment is made?