11 May DISCUSS THE APPROPRIATENESS OF THE USE OF ROI, RI, AND EVA AS PERFORMANCE MEASURES.
Fixed
costs are always irrelevant in decision making. Discuss. [5 marks] TASK 4:
Budgetary Control Systems Madihaa Company Pte Ltd intends to start business on the first of
January. Production plans for the first four months are as follows:January 20,000 units February 50,000 units March 70,000 units April 70,000 units Each unit requires 2 kilograms of material. The company would like
to end each month with enough raw material inventories on hand to cover 25 per
cent of the following months production needs. The material costs $7 per
kilogram. Management anticipates being able to pay for 40 per cent of its
purchases in the month of purchase. They will receive a 10 per cent discount
for these early payments. They anticipate having to defer payment to the next
month on 60 per cent of their purchases. No discount will be taken on these
late payments. The business starts with no inventories on 1 January.Requireda.Determine the budgeted payments
for purchases of materials for each of the first three months of operations. [8
marks] b.Madihaa Company Pte Ltd is
preparing a master budget for the coming year. At present senior management are
reviewing the inventory policies. Which budgets, would policies concerning the
level of inventories be affected and why? c. Discuss the potential issues
arising for an entity if it takes a budgetary approach in which budgetary data
are imposed on business unit managers by the CEO. Contrast this with an
approach whereby the budgetary data is developed in a more participatory
environment. TASK 5: Decentralization and Performance Evaluation Zam Gems Maldives (Pvt) Ltd manufactures jewelry for three
different markets. The business has grown from a backyard hobby for the owners
to quite a large manufacturing concern. The company is structured into three
distinct divisions aligned with each market, as shown.Childrens jewellery Adult
jewellery Crystals &
homewaresSales $4,720,000 $2,480,000 $6,300,000Variable costs 33% 38% 50%Fixed costs $1,960,000 $1,800,000 $1,700,000Divisional assets $5,000,000 $4,000,000 $12,000,000Common costs for the year totaled $500,000 and were allocated based
on sales. The management of Zam Gems Maldives (Pvt) Ltd has come across a
further investment opportunity. It does not want to develop a separate
division, so one of the existing divisions would need to take responsibility
for the new investment opportunity. Management estimates that the new
investment opportunity would require an investment of $2500000 to deliver sales
of $2000000 with variable costs estimated at $625000 and fixed costs at $1000000.Requireda.
At present,
divisional performance is evaluated based on ROI. If this is the case, which
division would want to take over the new investment opportunity? [5 marks]b.
If the company
changed its performance evaluation criteria to encompass residual income based
on a charge for capital of 14 per cent, which division would want to take over
the new investment opportunity? [5 marks]c.
Why is there a
need to measure organizational performance? [5 marks]d.
Discuss the
appropriateness of the use of ROI, RI, and EVA as performance measures. [5
marks]
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