Reference no: EM132461616
Problem - Southern and Northern Divisions of Salam plc produce roughly the same kind of output-packaging material. It is therefore considered appropriate by headquarters to compare their performance. For the accounting period just ended, finance staff, at the headquarters, has prepared the following summarised information: Southern Division Northern Division RM RM Sales: External Customers 1,150,000 132,000 Other Divisions 53,000 926,000 1,203,000 1,058,000 Variable costs: Production 180,000 120,000 Selling and distribution 91,000 47,000 271,000 167,000 Contribution 932,000 891,000 Less Fixed costs: Production 164,000 264,000 Selling and distribution 107,000 57,000 Administration 132,000 85,000 Apportionment of headquarters costs 84,000 146,000 487,000 552,000 Divisional operating profit 445,000 339,000 Divisional capital employed 1,800,000 2,300,000 Return on capital employed 24.72% 14.74% Concern has been expressed at the poor ROCE achieved by Northern Division, especially in the light of the recent major investment in new plant and equipment undertaken there, and also compared to the return achieved by Southern Division with very much older operating assets. Salam plc's target return or cost of capital is 12%.
Required -
a) Demonstrate how the ROCE for each division has been calculated and suggest an improved approach, explaining your reasoning. As far as the figures permit, restate the divisional ROCEs on the basis of your suggested improvement.
b) Calculate each division's residual income and comment on divisional performance as revealed by this measure.
c) For each of the divisions, determine the following additional indicators of financial performance (please round to 2 decimal places): (i) Variable production costs: sales percentage (ii) Variable selling and distribution costs: sales percentage (iii) Contribution: sales percentage (iv) Fixed production costs: sales percentage (v) Fixed selling and distribution costs: sales percentage (vi) Fixed administration costs: sales percentage (vii) Controllable operating profit: sales percentage (viii) Sales: capital employed percentage
d) Using your answers to (a), (b) and (c), and any other relevant information from the question, analyse the financial performance of the two divisions.