Reference no: EM133010325

Question - Ehtesham Industries is a diversified manufacturer of household products with several divisions, including the Hafeez Division. Ehtesham evaluates performance of its divisions on the basis of return on investment (ROI), with investment defined as "average operating assets employed". Ehtesham dictates that all investments in operating assets should earn a minimum return of 9 percent before income taxes. Hafeez's cost of goods sold is entirely variable; however, its administrative expenses do not fluctuate with volume. Selling expenses are considered a mixed cost with 40 percent attributed to sales volume. The division's operating assets employed were Rs.80,750,000 at December 31, 2020, same as the year before. The 2020 income statement for Hafeez follows.

HAFEEZ STEEL DIVISION Income Statement For the Year Ended December 31, 2020 (in thousands of rupees)

Sales revenue 35,000

Less expenses:

Cost of goods sold 18,500

Administrative expenses 3,955

Selling expenses 2,700

Income from operations, before tax 9,845

Required -

a. Hafeez comes across an opportunity to invest in a project that would earn an ROI of 10 percent. Is it probable that Hafeez would accept the project? Why or why not?

b. Identify several decisions that Hafeez should control if the division is to be fairly evaluated as a separate investment center within Ehtesham Industries, using either ROI or RI performance measures.

c. What are the problems associated with having ROI as a performance measure for evaluating performance of manager of an investment center?