Question 3 (30 marks)Division A and Division B are two separate investment centres in a...
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Accounting
Question 3 (30 marks)
Division A and Division B are two separate investment centres in a large manufacturing company. Each month, operating statements must be prepared by each division and these are used as a basis for performance measurement for the divisions. Last month, senior management decided to recharge head office costs to the divisions. Consequently, each division is now going to be required to deduct a share of head office costs in its operating statement before arriving at 'net profit', which is then used to calculate return on investment (ROI). Prior to this, ROI has been calculated using controllable profit only. The company's target ROI, however, remains unchanged at 20% per annum. For each of the last three months, Divisions A and B have maintained ROIs of 22% per annum and 23% per annum respectively, resulting in healthy bonuses being awarded to staff. The company has a cost of capital of 10%. The budgeted operating statement for the month of July is shown below:
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