Page 93 - DMGT514_MANAGEMENT_CONTROL_SYSTEMS

Management Control Systems

Notes Solution:
1. Operating profit
(Rupees)

Eastern Division Western Division
Sales 10,00,000 10,00,000
Less: Manufacturing expenses 5,00,000 6,00,000
Marketing expenses 1,00,000 1,00,000
Administrative expenses 2,00,000 2,00,000
8,00,000 9,00,000
Operating profit 2,00,000 1,00,000
Total Net Assets:
Current Assets 2,00,000 2,00,000
Fixed assets 10,00,000 20,00,000
Less: Acc Depr. 8,00,000 2,00,000 4,00,000
16,00,000
4,00,000 18,00,000
Return on investment based on total 200000 x 100 = 50% 100000_ x 100 = 5.6
assets 400000 1800000

2. Total gross assets = Total net assets + Accumulated depreciation
Hence ROI based on total gross assets:
200000
Eastern division = × 100 = 16.7%
400000+800000

Western division

3. Since the western division plant was set up later, fixed assets base is double than the
eastern division plant and higher depreciation of high cost plant i.e., the western division’s
reduced operating profit. The above have resulted lower ROI for the western division.
This is one of the disadvantages of ROI basis of performance measurement of divisions.
This can be corrected by valuing assets on replacement cost basis.
Problem 5: Osaka Corporation is a decentralized manufacturing company with three producing
divisions. Following is a schedule of sales and cost data for the accounting year just completed:
Division A Division B Division C
Sales 2,25,000 90,000 6,00,000
Cost of goods sold 1,05,000 37,500 3,60,000
Operating expenses 90,000 30,000 1,50,000
Current assets 75,000 30,000 1,20,000
Land held for investment - 1,20,000 -
Fixed assets (gross) 1,80,000 1,50,000 7,50,000
Accumulated depreciation 90,000 15,000 5,25,000
Current liabilities 15,000 22,500 60,000
Long-term liabilities 22,500 - 37,500

Required:
Compute the following: (a) Net income for each division (b) ROI using gross assets, (c) ROI
using net assets, (d) ROI using gross assets employed, (e) Residual income using a target income
of 15% of net assets, (f) Income as a percentage of sales, (g) Prepare a chart ranking the divisions
for each of the performance measures.

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