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Category > Economics Posted 10 Jun 2017 My Price 8.00

AB Ltd operates retail stores throughout the country

 

AB Ltd operates retail stores throughout the country. The business is division aliased. Included in its business are Divisions A and B. A centralized and automated warehouse that replenishes inventories using computer-based systems supports the work of these divisions. For many years AB Ltd has given considerable autonomy to divisional managers and has emphasized return on investment (ROI) as a composite performance measure. This is calculated after apportionment of all actual costs and assets of the business and ‘its appropriate service facilities’, which includes the costs and assets of the warehouse. The following information is available for last year:

 

Division A

Division B

 

Actual

Budget

Actual

Budget

 

£m

£m

£m

£m

Sales revenue

30.0

50.0

110.0

96.0

Assets employed

20.0

 

48.0

 

Operating profit

4.3

 

14.7

 

These actual figures do not include the apportioned costs or assets of the automated warehouse shared by the two divisions. The data available for the warehouse facility for last year are:

 

Warehouse

 

Actual

Budget

 

£m

£m

Despatches (that is, sales revenue)

140.0

146.0

Assets employed at book value

8.0

8.0

Operating cost:

 

 

Depreciation

1.6

1.6

Other elements of fixed cost

1.1

0.9

Variable storage cost

0.6

0.5

Variable handling cost

1.3

1.1

Total operating cost

4.6

4.1

When the warehouse investment was authorized it was agreed that the assets employed and the actual expenses were to be apportioned between the divisions concerned in the proportions originally agreed (50 per cent each). However, it was also pointed out that in the future the situation could be redesigned and there was no need for one single basis to apply. For example, the space occupied by inventories of the two divisions is now A 40 per cent and B 60 per cent. This information could be used in the apportionment of assets and expenses.

Required:

(a) (1) Calculate the actual return on investment (ROI) for Divisions A and B after incorporating the warehouse assets and actual costs apportioned on an equal basis as originally agreed.

(2) What basis of apportionment of assets and actual costs would the manager of Division A argue for, in order to maximize the reported ROI of the division? How would you

anticipate that the manager of Division B might react?

(b) It has been pointed out that a combination of bases of apportionment may be used instead

of just one, such as the space occupied by inventories (A 40 per cent, B 60 per cent) or the level of actual or budgeted sales revenue. If you were given the freedom to revise the calculation, what bases of apportionment would you recommend in the circumstances?

Discuss your approach and recalculate the ROI of Division A on your recommended basis. Work to two places of decimals only.

 

 
 

Answers

Alpha Geek
(8)
Status NEW Posted 10 Jun 2017 10:06 AM My Price 8.00

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Attachments

file 1497088846-865872_1_636326099125228986_AB-LTD-09-JUNE-2017.xlsx preview (92 words )
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