Question

Question 4

Ghana Post Company Ltd has two divisions, EMS and the Postal division. Ghana Post Company Ltd intends to increase its investment in EMS and Postal division by GHS10,000 each. The increase in investment is expected to increase net income by GHS18,000 and GHS20,000 in EMS and Postal respectively. Currently, the assets structure of both EMS and Postal is analysed below:

EMS Postal

GHS GHS

                                    Investment

Motor vehicles 70,000     180,000

Buildings 30,000 120,000

Scales/Equipment 20,000    100,000

120,000    400,000

                                    Current Asset

                                     Stamps 25,000 50,000

                                     Stationary 45,000 80,000

                                      Debtors 80,000 70,000

                                      Bank 130,000

  60,000 330,000

                                     Current liabilities 210,000

Creditors          10,000 200,000   20,000 310,000

   320,000 710,000

Current Revenue for both EMS and Postal are GHS364,000 and GHS692,000 respectively. Total expenses as a percentage of revenue are 80.2% and 88.2% for EMS and Postal respectively. Assume cost of Ghana Post is 15% and the company evaluates its managers based on return on investment (ROI) and Residual Income (RI).

Required:

1. Calculate ROI before and after the expansion.
2. Using the cost of capital, determine the residual income before and after the expansion.
3. Should management of Ghana Post invest in the expansion? Give reasons

1. Describe the main characteristics and objective of profit and investment centres.
2. Explain conditions necessary for the successful introduction of both profit and investment centres.