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Divisional performance measures

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Divisional performance measures

 

Compare and contrast the use of residual income and return on investment in divisional performance measurement, stating the advantages and disadvantages of each.        

 

 

Division Y of Chardonnay currently has capital employed of $100,000 and earns an annual profit after depreciation of $18,000. The divisional manager is considering an investment of $10,000 in an asset which will have a ten-year life with no residual value and will earn a constant annual profit after depreciation of $1,600. The cost of capital is 15%.

 

Calculate the following and comment on the results.

 

(i)

The return on divisional investment, before and after the new investment

 

(ii)

The divisional residual income before and after the new investment

 

 

 

 

 

Explain the potential benefits of operating a transfer pricing system within a divisionalised company.

Reference no: EM13558115

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