Divisional performance

Past Paper Questions:

Mcqs:
1) A
Division A: Profit = $14·4m x 30% = $4·32m
Imputed interest charge = $32·6m x 10% = $3·26m
Residual income = $1·06m
Division B: Profit = 8·8m x 24% = $2·112m
Imputed interest charge = $22·2m x 10% = $2·22m
Residual income = $(0·108)m

2) B
Increase in variable costs from buying in (2,200 units x $40 ($140 – $100)) = $88,000
Less the specific fixed costs saved if A is shut down = ($10,000)
Decrease in profit = $78,000

3) C
Divisional profit before depreciation = $2·7m x 15% = $405,000 per annum.
Less depreciation = $2·7m x 1/50 = $54,000 per annum.
Divisional profit after depreciation = $351,000
Imputed interest = $2·7m x 7% = $189,000
Residual income = $162,000.

4) A
Working
Opening capital employed: $4m + $0·5m = $4·5m
Closing capital employed: ($4m x 0·9) + ($0·5 x 1·2) = $3·6m + $0·6 = $4·2m
Average capital employed = $4·35m
Profit after depreciation = $1·2m
Therefore ROI = $1·2m/$4·35m = 27·59%

5) B
Revised annual profit = $190,000 + $10,000 profit on the sale of the asset = $200,000
Revised net assets = $1,000,000 – $40,000 NBV + $50,000 cash – $250,000 cash + $250,000 asset = $1,010,000
ROI = ($200,000/$1,010,000) x 100 = 19·8%

Practice kit questions:

Mcqs:
1. 1 only
2. 2 only
3. Goal congruence in decision making
4. 2 only
5. The lower of the net marginal revenue for the transferring-in division and the external purchase price in the
market for the intermediate product
6. Both 1 and 2
7. $
12.90

8. (2) only
 9. $750
10. 19.8%

11. 30.4%

12. $830m

13. $236
14.
2400

15. Decrease of $78,000

$ 10.50
16.

17. (1), (2) and (3)

18. D

OT Cases:
Cherry Co
1. B $30
Division A has available capacity of 15,000 units. Division A does not want to lose its contribution margin of $7 per unit, and
therefore the minimum price it would now accept is $30 as shown below.
$30 (variable cost) + $0 (opportunity cost) = $30
In this case Division A and B should negotiate a transfer price within the range of $30 and $35 (cost from outside supplier).

2. C $37
Division A charges $37 and derives a contribution margin of $7 per unit of Product X. Division A has no spare capacity.
Therefore, Division A must receive from the Division B a payment that will at least cover its variable cost per unit plus its lost
contribution margin per unit (the opportunity cost). If Division A cannot cover that amount (the minimum transfer price), it should not
sell units of Product X to Division B.
The minimum transfer price that would be acceptable to Division A is $37, as shown below.
$30 (variable cost) + $7 (opportunity cost) = $37

3. A Full cost
Under this approach, the full cost (including fixed overheads absorbed) incurred by the supplying division in making the 'intermediate'
product is charged to the receiving division. It can be used when there is no external marker for the product being transferred, or if an
imperfect market exists.

4. B 2 only
Statement 1 is false. 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 the company's total profit. Statement 2 is true.

5. A 1 only
Statement 1 is true. Statement 2 is false because Division A is likely to save money on selling and distribution expenses if they can
sell product X to Division B.
Stickleback Co
1.

2.

3. B 2 only.
Statement 1 is false because if a manager's performance is being evaluated, only those assets which can be traced directly
to the division and are controllable by the manager should be included.
The second statement is true. Short-termism is when there is a bias towards short-term rather than long-term performance.
It is often due to the fact that managers' performance is measured on short term results such as ROI.

4. C 1 and 4
'Increase payables' and 'Keep Kingfisher's old machinery'
One of the problems with using ROI as a performance measure is that it can be manipulated.
Allowing non-current assets to depreciate (giving a lower NBV) and delaying payments to suppliers, both reduce the
capital employed and therefore increase the ROI.
Accepting all projects with a positive NPV may not necessarily increase the ROI. Projects may have lower ROIs than
Kingfisher's current ROI and this could cause Kingfisher's overall ROI to reduce.
ROI is calculated using profit before interest and so interest makes no difference to the ROI.

5. A 1 only
Statement 1 is a danger of decentralisation. Managers may make dysfunctional decisions.
Statement 2 is false. The divisional organisation frees top management from detailed involvement in day-to-day
operations and allows them to devote more time to strategic planning.

Alder Co
1.
 2.

3. 1 only
Statement 1 is said to be one of the key advantages of a divisionalised structure.
Statement 2 is false. The divisional organisation frees top management from detailed involvement in day-to-day
operations and allows them to devote more time to strategic planning.
4. Neither 1 nor 2.
Statement 1 is false because if a manager's performance is being evaluated, only those assets which can be traced directly
to the division and are controllable by the manager should be included.
Statement 2 is false because an investment centre could not operate without the support of head office assets and
administrative backup.
5. Both 1 and 2
The first statement is true and is a key exam focus point that should be remembered for your exam.
The second statement is true, and it is a risk associated with the use of ROI. If a manager in Alder Co's bonus depends on
ROI being met, the manager may feel pressure to massage the measure.

Apple Co
1.

2.

3.
Both 1 and 2

Statement 1 is a key advantage of working with RI.

Statement 2 is a key disadvantage of working with RI.

4.
2 only
Statement 1 is false. The market price can act as a disincentive to use up any spare capacity in the selling division of
Apple Co, particularly if the market price does not provide a significant mark-up. A price based on incremental cost, in
contrast, might provide an incentive to use up the spare resources in order to provide a marginal contribution to profit.
Statement 2 is true and is a key advantage of using market price as a basis for transfer pricing.
5.
Both 1 and 2
Both statement are examples of the conditions under which market based transfer prices are not suitable, and therefore a
cost based approach would be preferable.

Box Co
1.

2.

3. Both 1 and 2
Both statements are reasons for the growing emphasis on NFPIs.
Traditional responsibility accounting systems fail to provide information on the quality of products, and therefore
statement 1 is true.
Financial performance indicators tend to focus on the short term. They can give a positive impression of what is
happening now but problems may be looming. Therefore statement 2 is true.

4. Keep managers informed about the short term budget targets

Options A, B, and D are all methods to encourage managers to take a long term view, so that the 'ideal' decisions are
taken.
Providing sufficient management information to allow managers to see what trade-offs they are making is amethod of
encouraging managers to take a long-term view. Managers must be kept aware of the long-term aims as well as shorter-
term (budget) targets.

5. 1 only
Statement 1 is a danger of divisionalised structures. Managers may make dysfunctional decisions.
Statement 2 is false. Only factors for which the manager can be held accountable should be included in
calculations, and therefore head office costs would not be included.
TRANSFER PRICING
1. A
One objective of a transfer pricing system is that divisional profit is measured accurately to allow performance to be
assessed fairly. If the correct transfer price is set, it should result in goal congruence and company profits should be
maximised.
2. $10,000 per month
Current profit = $8,000 + $5,500 = $13,500
New profit = $8,000 – $4,500 = $3,500
Hence the change in profit is $10,000 per month.

Tutorial note
You could also answer this question by removing Pottery’s internal sales to Painting of $25,000. This revenue of $25,000
will not arise if Painting sources its unglazed bowls externally, but neither will the variable costs of $15,000 for Pottery.
Therefore, the net impact on Pottery’s profits is $25,000 – $15,000 = a drop of $10,000.

3. C
We must take into account the profit lost from internal transfers. We are now purchasing unglazed bowls at $24, rather
than making them at $15. Extra cost is therefore $9 per bowl for 1,000 bowls, a total of $9,000 increase in costs.

Tutorial note
You could also answer this question like this: Painting division profit increases by 1,000 units × $1 = $1,000; Pottery
division profit decreases with lost sales of $25,000, but saves costs of $15,000. Net effect on the business’s profits as a
whole = a $9,000 decrease.

4. Profit would reduce by $1,000, $1 for each of 1,000 units.

5. D

GRATE CO
1. C
2. B
Statement (1) is correct as the ROCE is 16% in both departments:
Div X: (18,500 + 5,500)/150,000 = 16%
Div Y (10,000 + 6,000)/100,000 = 16%
Statement (2) is not correct: a higher imputed charge reduces the amount left as residual income.
Statement (3) is not correct as the calculation of $4,000 does not adjust for fixed costs: 18,500 + 5,500 – 0.15 × 150,000 =
$1,500
Statement (4) is correct:
Div X (50,000/150,000) = 33.33%; Div Y (40,000/100,000) = 40%
3. B
ROI %
Project 1 25
Project 2 22
Project 3 18

Current + 1 = (24,000 + 12,000)/(150,000

+ 48,000) = 36,000/198,000 =
18.18%
Current +1+2 =
(36,000 + 22,000)/(198,000 + 100,000) = 58,000/298,000 = 19.46%

4. B
RI for each project = Controllable profit – notional interest
So RI for project 1 = $12,000 – (10% × 48,000) = $7,200
RI for project 2 = $22,000 – (10% × 10,000) = $12,000
RI for project 3 = $9,000 – (10% × 50,000) = $4,000
5. D
Private sector
Past Paper Questions:
Mcqs:

1. B
ROCE can be calculated by multiplying the operating profit margin and the asset turnover.
28% x 65% = 18·2%

2. D

The first statement is wrong because customers are actually paying more quickly.
The second statement is wrong because inventory levels have increased.

Practice kit questions:

Mcqs:
1. Process efficiency perspective
2. Cost of the local fire Process service per member of the local population
3. Competitiveness
4. Speed
5. Percentage of customers making repeat orders
6. Internal business (operational) perspective
7. Sales revenue from new products as a percentage of total revenue
8. Profit before interest and tax
9. Shareholders will be looking for increasing dividends and increased share price
10. Rewards should be linked to a wider variety of performance measures including some nonfinancial measures
11. A. Stakeholders will have different objectives and companies may deal with this by having a range of
performance measures to assess the achievement of these objectives
B. A downturn in the industry or in the economy as a whole could have a negative impact on performance
D. Company performance could be affected if a competitor reduces its prices or launches a successful
advertising campaign
12. Participation in standard setting is more motivating than where standards are imposed
13. Overstatement of a prepayment
14. C 49 days 1.93:1
15. Company B is using its assets more efficiently
16. A 10.7% 8.38%
17.
i. Competitiveness
ii. Innovation
iii. Profitability
iv. Resource utilisation
v. Flexibility
vi. Quality
18. Number of faulty goods returned as a percentage of deliveries made in the month

19. Learning perspective

20. Customer satisfaction ratings
21. Percentage of budgeted number of quotations actually issued
22. To look at the fuller picture of the business
 23. (iii) only
24. C
25. C

OT Cases:
Jamair
1. D Financial
The financial perspective considers whether the management in Jamair meets the expectations of its shareholders and how
it creates value for them. This perspective focuses on traditional measures such as growth, profitability and cost reduction.

2. A Customer perspective
The customer perspective considers how new and existing customers view Jamair. The objective is to ensure that flights
land on time.

3. B Internal business perspective

The internal business perspective makes Jamair consider what processes it must excel at in order to achieve financial and
customer objectives. The measure may be: Reduction in 'on the ground' time from 50 minutes.

4. D Financial perspective
The measure could be 'Revenue per available passenger mile'. The financial perspective considers whether the
management in Jamair meets the expectations of its shareholders and how it creates value for them.

5. A 1 only
Statement 1 is true. By its very nature, qualitative data is not quantified. At best, qualitative measures are converted into
quantitative measures using a subjective scoring system.
Statement 2 is false. An organisation is much more likely to have a well-established system for measuring quantitative
data, especially in the areas of accounting and sales statistics.

Squarize
1. B Internal business perspective
This is measuring the effectiveness of improving the broadband service (an internal process) and is therefore part of the
Internal business perspective,
2. A Customer perspective
The performance objective associated with this measure would be to 'Increase number of new customers'. It measures
whether customers are willing to pay the individual prices for each service.
3. C Sales revenue from new standalone service as a percentage of total revenue
The most appropriate of these measures as an indication of innovation within the organisation is revenue from new
standalone services as a percentage of total revenue. (This is more meaningful for comparison purposes than simply
measuring average revenue per new standalone service.)
4. B Renewing subscription or making repeat orders is possibly a measure of customer satisfaction, and so might be
used as a measure of performance from a customer perspective in a balanced scorecard.
The growth in the product range is more relevant to innovation, and speed of order processing and orders per sales
representative are measures of operational efficiency and effectiveness rather than customer attitudes to the organisation
and its products.
5. B Innovation
Innovation is an element of the 'Dimensions of performance' building block, but it is not included as a standalone building
block.
The three building blocks are:
Dimensions of performance
 Standards
Rewards

PIND CO
1. C
Gearing: 190,000/610,000 = 31% Interest cover 42,000/16,000 = 2.625
2. B
3. B
4. 26 days
Quick ratio = 0.9.
We know payables is $50,000 and therefore, receivables + cash = $45,000.
As receivables : cash is 2 : 2.5, so receivables = $20,000 and hence receivable days are: (20,000/(40,000/0.15)) × 365 = 26
days
5. C
Current asset turnover = turnover/capital employed = (42,000/0.15)/610,000 = 0.459
Increase turnover by 20%: ((42,000/0.15) × 1.2)/610,000 = 0.551, which is an increase of 20%.

HOSP
1. B
2. B
Statement (1) is not correct. Measures should be aligned with the company strategy and the relationship between measures
should be understood.
Statement (2) and (4) are correct. Balanced scorecards can easily become a confusing mass of measures, some of which
even contradict each other. There may be too many measures and action to achieve some of them may contribute to failure
to achieve others. The measures may not always be prioritised.
Statement (3) is not correct: the balanced scorecard measures should be aligned with long-term strategic goals.
3. C
4. B
The measure of the number of patients seen within 15 minutes of arrival would fit within the flexibility dimension,
whereas medication errors per dose would be within the quality dimension.
5. B
 Not For Profit organizations
Past Paper Questions:
Mcqs:
1) B
2) D
3) C
Exam success will be a given objective of a school, so it is a measure of effectiveness.

4) A
A memory stick is much more likely to get mislaid and compromise security than a password protected laptop. It is likely
that memory sticks could get lost or that information is left on home computers.
In the context of the scenario all the other options are good practice.

Practice kit questions:

Mcqs:
1. Neither 1 nor 2
2. Number of patients treated per $1 spent on the state hospital service
3. Average waiting time at the hospital
4. Neither 1 nor 2
5. Both (1) and (2)
6. (2) only
7. Effectiveness
8. (2) only
9. Economy
10. D 1 2 3

11. The government figures for RPI or CPI

12. (2) only
Information Systems
Past Paper Questions:
Mcqs:
1) A
Statement (ii) describes an enterprise resource planning system, not an executive information system.

2) C
All of the others are internal sources of information.

3) D
The tracking and summarising of critical strategic information is done by an Executive Information System (EIS).
The other three options are all likely to be potential benefits which would result from the introduction of an ERPS.

Practice kit questions:

Mcqs:
1. Both 1 and 2
2. Reasons (1) and (2)
3. 1 only
4. External secondary data
5. Executive information system
6. 2 only
7. Both 1 & 2 only
8. 1 only
9. Firewall
10. Universal passwords
11. If working from home, departmental employees must use a memory stick to transfer data, as laptop computers
are not allowed to leave the department.
12. Accurate information on current position
13. Highly summarised showing overall trends
14. Acceptable to the user
15. A tax calculator which predicts the level of tax payable in different scenarios
16. Production output reports
17. Looking through sales records for the last year
18. (2) only
19. A management information system
20. Decision based software
21. Critical strategic information can be summarized
22. (iii)
23. Strategic planning