DIVISIONAL PERFORMANCE ROI & RI

LECTURE EXAMPLE 1

for investment centre, the manager is responsible for revenues, cost and profit.
so the costs he is responsible is (i) generation of revenues (ii) investment of non current assets and (iv)
salary costs

(iii) apportioned of Head office costs is controllable by the head office not the divisional manager

the answer FOR LE1 is D

LECTURE EXAMPLE 2

ANSWER: C

LECTURE EXAMPLE 3

1. B

Vittorio 90000/500000 x 100%= 18%

Dugaldo 1350000/7500000x100%=18%

2. C
look at the question. it asks you to calculate the ROI for the NEW LABOUR SAVING
EQUIPMENT...so specifically ROI for the new equipment

increase in profit/ new investment = 1200/8000x100% = 15%

manager might reject because the ROI of the new investment is 15% which is lesser than the
current ROI in Victorio's which is 18%.
company as a whole will accept this new equipment investment because it is higher than
company's ROI which is 12%.
this is an example of DYSFUNCTIONAL BEHAVIOUR

3. C

WE CAN CALCULATE THE NEW ROI FOR VICTORIO'S IF IT UNDERTAKES THE NEW EQUIPMENT
INVESTMENT AS SUCH:
NEW ROI = (90,000+1200)/(500000+8000) = 17.95%

SO BY UNDERTAKINGS THE NEW INVESTMENT ROI IN VICTORIO'S WILL DECREASE. SO THAT

DIVISIONAL PERFORMANCE ROI & RI

IS WHY THE MANAGER DID NOT WANT TO UNDERTAKE THE NEW INVESTMENT FOR THE
EQUIPMENT

4. B

for (4) the new oven can generate $60,000 profit (before deducting depreciation). so you have to
minus depreciation from this net profit. depreciation is 20% per annum. so net profit is $60000 -
(0.2 x $75000) = $45000

so the ROI of the new oven = $45000/$75000 = 60%

5. C
firstly you need to calculate the ROI for current situation (no replacement of new oven) first for
the manager then you can decide what is the manager decision for (5)
the current ROI (no replacement of new oven) is as follows:

the net profit = $60,000 - $25,000 (maintenance & depreciation) = $35,000

capital employed = $2000
so current ROI = $35000/$2000 = 1750%

so answer for (5) C. manager will reject as its current ROI is higher than ROI for new oven and
Company will accept as ROI of new oven which is 60% is higher than Company's ROCE of 12%

6. A

Use return of capital employed or required rate of return if cost of capital is not given.

for Dugaldo you are given information on your existing oven and new oven. your existing oven
can still generate some profit, that's why you need to determine the incremental profit of the
new oven and the old oven. then reduce by the imputed cost of interest (the new investment
cost x 12%) then you get the residual income
DIVISIONAL PERFORMANCE ROI & RI