This question contains two (2) unrelated parts. Answer all questions. (4 markah/marks) Tulip Department, one of Fancy Fl
Posted: Sun Jul 03, 2022 12:53 pm
This question contains two (2)unrelated parts. Answer all questions.
(4 markah/marks)
Tulip Department,one of Fancy Flower investment centers, has ROI which ranged from14% to 17%. During the past year, Tulip had an investmentopportunity that would yield an estimated rate of return of 13%.Tulip’s management decided against the investment because itbelieved the investment would decrease the department’s overallROI.
Lastyear’s income statement for Tulip Department is given below.The department’s operating assets employed were RM12,960,000 at theend of the year, which represents an 8% increase over the previousyear-end balance.
TulipDepartment
IncomeStatement for the year ended December 31
RM
RM
Sales
31,200,000
Cost of goodssold
16,500,000
Gross margin
14,700,000
Less operating expenses:
Selling expenses
5,620,000
Administrativeexpenses
7,208,000
12,828,000
Net operating income
RM1,872,000
Required:
a) Compute (i) Return on investment (ROI) and (ii) Residualincome (RI) as performance measures for Tulip Department.
(4 markah/marks)
b) Why do you think the managementof Tulip had rejected the investment opportunity, when the decisionis made based on ROI calculation? Explain.
(3 markah/marks)
c) Would the management of Tulip Department have been morelikely to accept the investment opportunity it had last year ifresidual income were used as a performance measure instead of ROI?Explain.
(3 markah/marks)
d) The Tulip Department is a separate investment centerwithin Fancy Flower. Identify the items Tulip must be free tocontrol if it is to be evaluated fairly, other than using the ROIor residual income performance measures.
(2 markah/marks)
e) Provide two (2) examples of situations where the use ofROI can lead to decisions which may harm the future competitivenessof a company.
(4 markah/marks)
(4 markah/marks)
Tulip Department,one of Fancy Flower investment centers, has ROI which ranged from14% to 17%. During the past year, Tulip had an investmentopportunity that would yield an estimated rate of return of 13%.Tulip’s management decided against the investment because itbelieved the investment would decrease the department’s overallROI.
Lastyear’s income statement for Tulip Department is given below.The department’s operating assets employed were RM12,960,000 at theend of the year, which represents an 8% increase over the previousyear-end balance.
TulipDepartment
IncomeStatement for the year ended December 31
RM
RM
Sales
31,200,000
Cost of goodssold
16,500,000
Gross margin
14,700,000
Less operating expenses:
Selling expenses
5,620,000
Administrativeexpenses
7,208,000
12,828,000
Net operating income
RM1,872,000
Required:
a) Compute (i) Return on investment (ROI) and (ii) Residualincome (RI) as performance measures for Tulip Department.
(4 markah/marks)
b) Why do you think the managementof Tulip had rejected the investment opportunity, when the decisionis made based on ROI calculation? Explain.
(3 markah/marks)
c) Would the management of Tulip Department have been morelikely to accept the investment opportunity it had last year ifresidual income were used as a performance measure instead of ROI?Explain.
(3 markah/marks)
d) The Tulip Department is a separate investment centerwithin Fancy Flower. Identify the items Tulip must be free tocontrol if it is to be evaluated fairly, other than using the ROIor residual income performance measures.
(2 markah/marks)
e) Provide two (2) examples of situations where the use ofROI can lead to decisions which may harm the future competitivenessof a company.
(4 markah/marks)