Page 131 - DMGT514_MANAGEMENT_CONTROL_SYSTEMS

Management Control Systems

Notes The GHI Corporation used the time adjusted rate of return, with a cut off rate of 8 percent
in evaluating its capital investment proposals. A ` 25,000 cash in flow for five years on an
investment of ` 1,00,000 has a time adjusted return of 8 percent. Consequently the proposed
investment is acceptable under the company’s criterion. Assume that the project is approved
and that the investment and profit were the same as estimated. Assets are included in the
divisional investment base at the average of the beginning of the years net book value.
Required: Calculate the rate of return that is earned by the G division on the new investment
for each year and the average rate for the five years, using straight line depreciation.
10. If assets are included in the investment base at their original cost, then the business unit
manager is motivated to get rid of them-even if they have some usefulness-because of the
business unit’s investment base is reduced by the full cost of the asset. Why, what are the
reasons?
11. Business unit managers are able to influence the level of receivables, indirectly by increasing
sales and directly by establishing credit terms (by approving individual credit accounts
and credit limits) and by their initiative in collecting overdue amounts. Discuss the
implications.

12. Under what circumstances the business unit manager may be reluctant to purchase new
machinery, though it complies with the corporate guidelines on capital expenditure and it
is necessary from company’s long term requirement. Explain this with an example.
Answers: Self Assessment

1. (c) 2. (a)
3. (a), (b), (d), (g), (h) 4. (b)
5. (a) 6. (a)
7. (d) 8. (a)

9. (d) 10. (c)
11. (a) 12. (c)
13. (d) 14. (b)

5.8 Further Readings

Books Anthony, Robert N and Govindrajan, Vijay, "Management Control System", Tata
McGraw Hill.
Kaura, Mohinder N, "Management Control and Reporting System", Response Books.
Maciariello, Joseph A. and Kirby Calvin J., Management Control Systems, 2nd
Edition, Prentice Hall of India Private Limited.
Merchant, Kenneth A, "Management Control System: Text and Cases", Pearson
Education Asia.
Saravanavel, P, "Management Control System", Himalaya Publishing House.

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