Page 90 - DMGT514_MANAGEMENT_CONTROL_SYSTEMS

Unit 4: Responsibility Centers

Notes
Actual 2004 (` ‘000) J K L
Profit 80 60 50
Current assets 90 190 350
Fixed assets 400 450 550
Total assets 490 640 900
Profit 16.3 9.4 5.6
ROI = × 100
Total Assets
Charges – 5% of current assets 4.5 9.5 17.5
Charges – 10% of fixed assets 40 45 55
Total charges 44.5 54.5 72.5
EVA = Profit minus charges 35.5 5.5 -22.5
Variation from objective (budget) - 9.5 + 0.5 - 7.5

Impact of different situations

Situation 1: Fixed Assets increases by ` 1, 00,000 and profit increases by ` 10,000, charges also
increase by ` 10,000.
J K L
Revised ROI 90 + 10 55 + 10 55 + 10
= 16.7% = 9.3% = 6.7%
500 + 100 600 + 100 800 + 100
Impact on budget Reduces Increases Increases
EVA 45 + 10 – 10 = 45 5 + 10 – 10 = 5 - 15 + 10 – 10 = - 15
Impact on budget No change No change No change

Situation 2: Fixed Assets increases by ` 1, 00, 000 and Profit increases by ` 7000, charges also
increase by ` 10,000

J K L
Revised ROI 90 + 7 55 + 7 50 + 7
= 16.2% = 8.9% = 6.3%
500 + 100 600 + 100 800 + 100
Impact on budget Reduces Reduces Increases
Revised EVA 45 + 7 – 10 = 42 5 + 7 – 10 = 2 - 15 + 7 – 10 = - 18
Impact on budget Reduces Reduces Reduces

Situation 3: Reduces Current Assets by ` 50,000, reduces profit by ` 5000, Reduces charges by
(5% on 50,000) ` 2500

J K L
-
Revised ROI 90( )5 55 - 5 50 - 5
= 18.9% = 9.1% = 6.0%
-
500( )50 600 - 50 800 - 50
Impact on budget Increases Reduces Reduces
Revised EVA 45 – 5 + 2.5 = 42.5 5 – 5 + 2.5 = 2.5 – 15 – 5 + 2.5 = – 17.5
Impact on budget Reduces Reduces Reduces
Situation 4: Fixed Assets reduced by ` 75,000, profits are reduced by ` 7500 and consequently
reduction of charges (10% on ` 75, 00) by ` 7500

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