Question

Y and Z are two divsons of a large company that operate in similar markets. Division Y represents the original manufacturing trade of the business but Division Z is a relatively new service/maintenance business and has seen considerable growth in its first two years of operation. The divisions are treated as investment centres and every month they each prepare an operating statements for these two divisions for October are shown below: statement to be submitted to the parent company. Operating Operating statements for October $000 900 345 $000 Sales revenue Less varlable costs 312 Contribution Less controllable fixed costs (includes depreciation on divisional assets) 243 98 42 Controllable income Less apportioned central costs 460 338 201 180 Net income before tax Total divisional net assets 122 $9.76m 21 $1.26m The company currently has a target return on capital of 12% per annum. However, the company believes its cost of capital is likely to rise and is considering increasing the target return on capital. At present the performance of each division and the divisional management are assessed primarily based on Return on Investment (ROI Required 6

Answer 1

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