Discuss other non-financial performance measures you feel

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Reference no: EM133337121

Max Plc produces a range of especially designed tyres for domestic, commercial and

industrial use. Due to the different markets that they operate in they have divisionalised

into three autonomous departments, Domestic, Commercial and Industrial. They have

just reported their results for the year ended 30th September 2022, which are shown

below. (All figures in £'000)

Division	Domestic	Commercial	Industrial	Total
Sales	2,300	1,800	1,400	5,500
Operating Profit	700	400	300	1,400
Capital Employed	3,000	1,400	2,000	6,400

The company rewards divisional mangers based on the Return on Capital Employed and has a Cost of Capital of 14%. You may assume that the company does not pay corporation tax.

Required:

a) For each division and a company calculate

i. The Return on Capital Employed

ii. The Operating Profit Margin

iii. The Asset Turnover Rate

b) Utilising the calculations in (a) comment on the profitability of each of the divisions and identify potential reasons why their results may differ.

c) It has been put forward that the domestic division should expand its product range. New Investment would cost £600,000 and generate an additional £90,000 in profit. As the manager of the Domestic Division would you recommend that this opportunity be invested in.

d) Utilising the calculations in part (c) critically appraise the use of Return on Capital Employed as a measure of Divisional Manager performance.

e) Using the Company's Cost of Capital of 14%, calculate the Residual Income of each division, overall company and for the additional investment described in part (c).

f) Utilising your calculations in part (e) explain why Residual Income may be a superior measure of a Divisional Manager performance.

g) Discuss other non-financial performance measures you feel the company should adopt and justify your choice.

Reference no: EM133337121

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