The divisional managers of West plc have requested that the method for calculating bonuses at the year be reviewed. Senior managers at the head office have proposed that a bonus of £40,000 will be paid to the divisional manager who has the best return on investment (ROI) of the 3 divisions and this policy is consistent with previous years. Divisional managers want the senior managers to take into account controllable costs and profits and residual income (RI) when deciding bonuses and also to include non-financial measures of performance. The main reason given by the head office for using ROI is that it is understood by all managers and that it is used by external analysts. Summary of Management Accounts to 31 December 1997 Southern (£) Eastern (£) Western (£) Sales 5,400,000 5,000,000 5,590,000 Controllable costs 3,700,000 3,502,000 3,660,000 Head Office Charges 998,000 1,282,000 1,170,000 Net profit 702,000 716,000 760,000 Capital Employed Southern (£) Eastern (£) Western (£) Total Investment 4,700,000 5,100,000 5,200,000 Controllable Investment 4,000,000 4,100,000 4,274,000 Cost of Capital The head office has estimated that the group cost of capital is 10% Financial and non-financial measures of performance The divisional managers normally report on a wide range of financial measures each month to the head office but only use non-financial measures internally and each divisional manager is allowed to use their discretion when deciding on the range and number of measures to useCalculate the net residual income for the Southern Division. Multiple Choice £1,000,000. £232,000. £1,300,000. £1,200,000

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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The divisional managers of West plc have requested that the method for calculating bonuses at the year be reviewed. Senior managers at the head office have proposed that a bonus of £40,000 will be paid to the divisional manager who has the best return on investment (ROI) of the 3 divisions and this policy is consistent with previous years. Divisional managers want the senior managers to take into account controllable costs and profits and residual income (RI) when deciding bonuses and also to include non-financial measures of performance. The main reason given by the head office for using ROI is that it is understood by all managers and that it is used by external analysts.

Summary of Management Accounts to 31 December 1997

	Southern (£)	Eastern (£)	Western (£)
Sales	5,400,000	5,000,000	5,590,000
Controllable costs	3,700,000	3,502,000	3,660,000
Head Office Charges	998,000	1,282,000	1,170,000
Net profit	702,000	716,000	760,000

Capital Employed

	Southern (£)	Eastern (£)	Western (£)
Total Investment	4,700,000	5,100,000	5,200,000
Controllable Investment	4,000,000	4,100,000	4,274,000

Cost of Capital

The head office has estimated that the group cost of capital is 10%
Financial and non-financial measures of performance
The divisional managers normally report on a wide range of financial measures each month to the head office but only use non-financial measures internally and each divisional manager is allowed to use their discretion when deciding on the range and number of measures to useCalculate the net residual income for the Southern Division.

Multiple Choice

£1,000,000.
£232,000.
£1,300,000.
£1,200,000

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