MAF651

PERFORMANCE MEASUREMENT

Question 1

Orchid Casa Sdn Bhd operates a chain of nursery business at three different locations;
Sungai Buloh, Batu Pahat and Kulim. Each division is designated as investment centre and
each divisional manager has the power to make capital investment decisions.

Currently, the performance of each division is assessed based on divisional Return on

Investment (ROI), which is computed by dividing divisional operating profit after tax by its
invested capital. The minimum required rate of return is 15%. The company's weighted
average cost of capital is 10% and the tax rate is 30%.

Each divisional manager is currently considering the following new investment opportunities:

New Proposed Project for: Sungai Buloh Batu Pahat Kulim

(RM) (RM) (RM)
Operating profit before tax 3,500,000 2,700,000 1,500,000
Capital required for investment 54,000,000 10,500,000 13,600,000

Required:

a. When evaluating divisional performance, the company can use a mixture of financial
and non-financial measures. Discuss briefly the difference between financial and
non-financial measures.

(5 marks)

b. Using ROI, explain which location is the best investment opportunities. (Show
your calculations)
(5 marks)

c. Based on economic value added (EVA), advise Orchard Casa Sdn Bhd regarding the
best investment opportunities.
(5 marks)
(Total: 15 marks)
 Question 2

lntan Auto Trading is a car dealer that has been in business for 10 years, dealing with selling
and servicing new and pre-owned car. The business is organized into three departments;
New Cars, Pre-owned Cars and Services. All three departments are shared under the same
building. Costs of land and building are RM12.9 million.

Departmental performance is based on return on investment (ROI). ROI is determined based

on net income before tax over total net assets. The company's financial manager proposed
to the board to use 16% weighted average cost of capital as the base for the evaluation. The
company tax rate is 25 percent.

The following table summarizes the land and building utilization by each department, other
net assets invested and the department's net income before tax:

New Cars Pre-owned Services Total

Cars
Percentage of land and
50% 40% 10% 100%
building utilizations

Other net assets RM2,700,000 RM1,500,000 RM6,300,000 RM10,500,000

Departmental net income

RM625,000 RM1,700,000 RM1,813,000 RM4,138,000
before tax

Required:

a. Briefly explain two (2) objectives of decentralization.

(5 marks)

b. i.Determine the most profitable department based on return on investment (ROI).

Show your calculations.

(4 marks)

ii. Comment on the performance of each department using economic value

added (EVA). Show your calculations.

(6 marks)
(Total: 15 marks)