Reference no: EM133016891

Question - Big and Happy Ltd is a large business organized and managed with a divisional structure. Two typical divisions are Asia-Pacific and Europe. They are engaged in broadly similar activities and, therefore, central management compares their results in order to make judgments on managerial performance. Both divisions are regarded as investment centers. The following is a summary of last year's financial results of the two divisions:

Asia-Pacific $'000 Europe $'000

Capital Investment 2,500 500

Sales 1,000 400

Cost of goods sold: Direct material and labour 300 212

Indirect manufacturing overhead 220 520 48 260

Gross profit 480 140

Selling and distribution expenses 180 40

Profit controllable by divisional manager 300 100

Allocation of central overhead (uncontrollable) 50 20

Divisional profit 250 80

At the beginning of last year, Asia-Pacific division incurred substantial expenditure on automated production lines and new equipment. The plant in the division of Europe is quite old. Approximately 50% of the sales of Europe are internal transfers to other divisions within the business. These transfers are based on unadjusted prevailing market price. The inter-divisional transfers of Asia-Pacific are minimal. The management focuses on return on investment as a major performance indicator with a minimum rate of return of 10%.

Required - For the two divisions, calculate the following (based on controllable profit): (i) Return on investment (ROI) (ii) Residual income (RI).