Reference no: EM132813876

Helmet and Ball are two divisions of a large, manufacturing company, Stevens. While both divisions operate in an almost identical markets, each division operates separately as an investment centre. The two divisions report on a decentralised basis. Each year, operating statements must be prepared by each division and these are used as a basis of performance measurement for the divisions.

Senior management decided to evaluate divisional performance using different measures. The company's target ROI remains unchanged at 25 percent per annum. The two divisions' results for the year were as follows:

                                                        Helmet.                Ball
Sale                                        £150 000.      £300 000
Operating income.                     £ 15 000.       £ 45 000
Asset base                                £ 75 000.     £150 000
Weighted average cost of capital      12%.        12%

The company wishes to maximise their shareholders' wealth.

Required:

Problem a. Calculate the return on investment (ROI) for each of the two divisions separately and comment which division would be awarded healthy bonuses based on the resulted ROI.

Problem b. Calculate the residual income (RI) for each of the two divisions separately, if the desired rate of return is 20%.

Problem c. Calculate asset turnover for each of the two divisions separately, if the desired rate of return is 25 percent.

Problem d. Calculate operating income margin for each of the two divisions separately, if the desired rate of return is 10 percent.

Problem e. Discuss why a company would want to divisionalise its operations.