Beruflich Dokumente
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Chapter 10
Control in Divisionalized Organizations
Answer to End of Chapter Exercises
Q 10.1
Division A Division B
a) '000 '000
Profit 480 130
CA 280 400
FA 1840 2200
2120 2600
ROI % 22.6% 5.0%
Project X delivers a postive net present value of 17,130 and is worthwhile, while project Y
delivers a negative net present value of 30,698 and is not worthwhile.
Project X provides a positive net present value and so should be accepted but reduces
the overall ROI of the division
Project Y provides a negative net present value and so should be rejected but increases
the overall ROI of the division
b) Head office would accept project X, but not Y. Divisional manager B might be tempted to
progress with project Y.
- Consider a change in the measurement system. In this chapter the possible use of
residual income as an alternative measure has been introduced. Note that a broader
range of measures are discussed in much greater detail in part 4 of this book.
d) See chapter
Residual income before
e) i) the investment Division A Division B
'000 '000
Net profit 480 130
Interest charge @15% 318 390
162 -260
Q 10.2
Fairdoo B division Cheapbuy
Price 90 95 85
contribution from division c 16
additional cost to company 74
Q 10.3 a) It is necessary to compare the cost of buying in against the cost of making.
i) The quote from Apple Ltd is 7,200, but division C will undertake work for Apple Ltd and will receive a
contribution from this work. Since division C is not operating at full capacity, this contribution should be
taken into consideration
Apple
7,200
less contribution division C (Note 1)* 600
Cost to company 6,600
ii) If the quote is given to division B, in order to calculate the cost to the company it is necessary to
identify whether the relevant cost of work completed by divisions C and D should be included
at variable cost or at market price.
Division B
Quoted price 9,200
mark-up 2,300
Costs to division B 6,900
less cost of component from division C 2,000
4,900
less cost of work sub-contracted to division D 2,700
Variable cost of division B 2,200
If there is spare capacity in divisions B, C and D then the additional cost to division B is
Variable cost of division B 2,200
Variable cost of division C 1,400
Variable cost of division D** (Note 2) 1,350
4,950
Additional cost to the company of manufacturing in division B if there is spare capacity in those
divisions as well as division C is 4,950.
The cost to the company of buying in from Apple is 6,600. It is therefore in the interests of the organisation
to manufacture the component internally.
b) If there is no spare capcity in division D then there is an opportunity cost of 1,350 i.e.
the relevant cost of using division D is the market price of 2,700. So relevant cost of Division B undertaking
the work is
Variable cost of division B 2,200
Variable cost of division C 1,400
relevant cost of division D 2,700
6,300
The relevant cost of 6,300 is still less than the cost of purchasing from Apple ltd so from a company
perspective it is still better to purchase from Division B
Q 10.4
a)i) '000 '000
Profit 450
CA 575
FA 525
1100
ROI % 40.9%
Machine will provide a saving of 70,000 per annum. Depreciation is 40,000 per
annum so the favourable impact on profit is 30,000 p.a. Net book value at the end
of the year on the asset is 240,000 - 40,000 = 200,000
Original add New
'000 '000 '000
Net
profit 450 30 480
Net capital
employed 1,100 200 1300
R.O.I
% 40.9% 15.0% 36.9%
Machinery
Year Cash flow Present value
'000 '000
0 -240 1 -240
1 70 0.8772 61
2 70 0.7695 54
3 70 0.6750 47
4 70 0.5921 41
5 70 0.5194 36
6 70 0.4556 32
Selling the asset for 40,000 would result in a loss of 60,000 (sale price of 40,000
- depreciation 100,000).
If the asset was kept the impact would be a loss of 40,000 (contribution 60,000
- depreciation 100,000
Both Head office and divisional managers would be against the decision.
Q 10.5
Cash Discount
a) Year flow factor Present value
'000 '000
0 -50 1 -50
1 5 0.9091 5
2 10 0.8264 8
3 10 0.7513 8
4 25 0.6830 17
5 25 0.6209 16
ARR is 10% and in the first year it is 0%. NPV is +ve but
given an ARR less than the target ROI, Jack Jones may not
be keen to undertake the investment.