Please answer questions step by step with necessary explanation. AB Ltd operates retail stores throughout the country and has a divisional structure with twodivisions A and B.A centralised and automated warehouse that replenishes inventories using computer-basedsystems supports the work of these divisions.For many years' AB Ltd has given considerable autonomy to divisional managers and hasemphasised return on investment (ROI) as a key performance measure. This is calculatedafter apportionment of all actual costs and assets of the business, and its appropriate servicefacilities', which includes the costs and assets of the warehouse.The following information is available for last year:Sales revenueAssets employedOperating profitDespatches (=sales revenue)Assets employedOperating costs:Division ADepreciationOther fixed costVariable storage costVariable handling costTotal operating costActual£m3020.04.3Budget£m50These actual figures do not include the apportioned costs or assets of the automatedwarehouse shared by the two divisions. The data available for the warehouse facility for lastyear are:Actual£mWarehouse1408.0Division BActual£m1101.61.10.61.34.648.014.7Budget£m1468.0Budget£m961.60.90.51.14.1When the warehouse investment was authorised it was agreed that the assets employed andthe total operating costs were to be apportioned between the divisions in the proportionsoriginally agreed (50% each). However, it was also pointed out that in the future the situationcould be redesigned and there was no need for one single basis to apply (eg. the warehousespace currently occupied by inventories of the two divisions is 40% for A and 60% for B). Required:a) Calculate the actual return on investment (ROI) for Divisions A and B after incorporatingthe warehouse assets and actual operating costs apportioned on an equal basis asoriginally agreed.b) Calculate the ROI for Divisions A and B using the space basis of apportionment for thewarehouse assets and actual operating costs. Compare your calculations with (a) andcomment on the likely reaction from each of the Divisional managers.c) In practice, a combination of bases of apportionment may be used instead of just one.Demonstrate how AB Ltd may apply different bases for the different elements ofwarehouse operating costs, and how this may impact on the ROI calculation.(All calculations to be limited to two decimal points, where applicable)

ROI refers to Return on investements. It is computed as a percentage of profit on total assets…

AB Ltd operates retail stores throughout the country and has a divisional structure with two divisions A and B. A centralised and automated warehouse that replenishes inventories using computer-based systems supports the work of these divisions. For many years' AB Ltd has given considerable autonomy to divisional managers and has emphasised return on investment (ROI) as a key performance measure. This is calculated after apportionment of all actual costs and assets of the business, and 'its appropriate service facilities', which includes the costs and assets of the warehouse. The following information is available for last year: Sales revenue Assets employed Operating profit Despatches (=sales revenue) Assets employed Operating costs: Division A Depreciation Other fixed cost Variable storage cost Variable handling cost Total operating cost Actual £m 30 20.0 4.3 Budget £m 50 These actual figures do not include the apportioned costs or assets of the automated warehouse shared by the two divisions. The data available for the warehouse facility for last year are: Warehouse Actual £m 140 8.0 Division B Actual £m 110 48.0 14.7 1.6 1.1 0.6 1.3 4.6 Budget £m 146 8.0 Budget £m 96 1.6 0.9 0.5 1.1 4.1 When the warehouse investment was authorised it was agreed that the assets employed and the total operating costs were to be apportioned between the divisions in the proportions originally agreed (50% each). However, it was also pointed out that in the future the situation could be redesigned and there was no need for one single basis to apply (eg. the warehouse space currently occupied by inventories of the two divisions is 40% for A and 60% for B).

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q