The divisional managers of West plc have requested that the method for calculating bonuses at the year be reviewed. Senior managers at the head office have proposed that a bonus of £40,000 will be paid to the divisional manager who has the best return on investment (ROI) of the 3 divisions and this policy is consistent with previous years. Divisional managers want the senior managers to take into account controllable costs and profits and residual income (RI) when deciding bonuses and also to include non-financial measures of performance. The main reason given by the head office for using ROI is that it is understood by all managers and that it is used by external analysts. Summary of Management Accounts to 31 December 1997 \(\begin{array}{|l|l|l|l|} \hline & \text { Southern }(£) & \text { Eastern }(£) & \text { Western }(£) \\ \hline \text { Sales } & 5,400,000 & 5,000,000 & 5,590,000 \\ \hline \text { Controllable costs } & 3,700,000 & 3,502,000 & 3,660,000 \\ \hline \text { Head Office Charges } & 998,000 & 1,282,000 & 1,170,000 \\ \hline \text { Net Profit } & 702,000 & 716,000 & 760,000 \\ \hline \end{array}\) Capital Employed \(\begin{array}{|l|l|l|l|} \hline & \text { Southern }(£) & \text { Eastern }(£) & \text { Western }(£) \\ \hline \text { Total Investment } & 4,700,000 & 5,100,000 & 5,200,000 \\ \hline \text { Controllable Investment } & 4,000,000 & 4,100,000 & 4,274,000 \\ \hline \end{array}\) Cost of Capital The head office has estimated that the group cost of capital is 10% Financial and non-financial measures of performance The divisional managers normally report on a wide range of financial measures each month to the head office but only use non-financial measures internally and each divisional manager is allowed to use their discretion when deciding on the range and number of measures to use. - Calculate the Net Residual Income for the Western Division

A) £240,000. B) £360,000. C) £420,000. D) -£200,000. A) £240,000. B) £360,000. C) £420,000. D) -£200,000. A

Ring Incorporated's income statement for the most recent month is given below.\[\begin{array} { l l l l } & \text { Total } & \text { Store } P & \text { Store } Q \\ \text { Sales } & £ 600,000 & £ 200,000 & £ 400,000 \\ \text { Variable expenses } & \underline { 384,000 } & \underline { 144,000 } & \underline { 240,000 } \\ \text { Contribution margin } & 216,000 & 56,000 & 160,000 \\ \text { Traceable fixed expenses } & \underline { 152,000 } & \underline { 42,000 } & \underline { 110,000 } \\ \text { Segment margin } & \underline { 64,000 } & \underline { £ 14,000 } & \underline { £ 50,000 } \\ \text { Common fixed expenses } & \underline { 34,000 } & & \\ \text { Net operating income } & \underline { £ 30,000 } & & \end{array}\] - For each of the following questions, refer back to the original data. If sales in Store Q increase by £30,000 as a result of a £7,000 increase in traceable fixed costs

A) Store Q's contribution margin should increase by £18,000. B) Store Q's segment margin should increase by £12,000. C) Store Q's contribution margin should increase by £11,000. D) Store Q's segment margin should increase by £5,000. A) Store Q's contribution margin should increase by £18,000. B) Store Q's segment margin should increase by £12,000. C) Store Q's contribution margin should increase by £11,000. D) Store Q's segment margin should increase by £5,000.

The divisional managers of West plc have requested that the method for calculating bonuses at the year be reviewed. Senior managers at the head office have proposed that a bonus of £40,000 will be paid to the divisional manager who has the best return on investment (ROI) of the 3 divisions and this policy is consistent with previous years. Divisional managers want the senior managers to take into account controllable costs and profits and residual income (RI) when deciding bonuses and also to include non-financial measures of performance. The main reason given by the head office for using ROI is that it is understood by all managers and that it is used by external analysts. Summary of Management Accounts to 31 December 1997 \(\begin{array}{|l|l|l|l|} \hline & \text { Southern }(£) & \text { Eastern }(£) & \text { Western }(£) \\ \hline \text { Sales } & 5,400,000 & 5,000,000 & 5,590,000 \\ \hline \text { Controllable costs } & 3,700,000 & 3,502,000 & 3,660,000 \\ \hline \text { Head Office Charges } & 998,000 & 1,282,000 & 1,170,000 \\ \hline \text { Net Profit } & 702,000 & 716,000 & 760,000 \\ \hline \end{array}\) Capital Employed \(\begin{array}{|l|l|l|l|} \hline & \text { Southern }(£) & \text { Eastern }(£) & \text { Western }(£) \\ \hline \text { Total Investment } & 4,700,000 & 5,100,000 & 5,200,000 \\ \hline \text { Controllable Investment } & 4,000,000 & 4,100,000 & 4,274,000 \\ \hline \end{array}\) Cost of Capital The head office has estimated that the group cost of capital is 10% Financial and non-financial measures of performance The divisional managers normally report on a wide range of financial measures each month to the head office but only use non-financial measures internally and each divisional manager is allowed to use their discretion when deciding on the range and number of measures to use. - Calculate the Controllable Residual Income for the Eastern Division

A) £1,000,000. B) £1,240,000 C) £1,088,000. D) £132,000. A) £1,000,000. B) £1,240,000 C) £1,088,000. D) £132,000.

Ring Incorporated's income statement for the most recent month is given below.\[\begin{array} { l l l l } & \text { Total } & \text { Store } P & \text { Store } Q \\ \text { Sales } & £ 600,000 & £ 200,000 & £ 400,000 \\ \text { Variable expenses } & \underline { 384,000 } & \underline { 144,000 } & \underline { 240,000 } \\ \text { Contribution margin } & 216,000 & 56,000 & 160,000 \\ \text { Traceable fixed expenses } & \underline { 152,000 } & \underline { 42,000 } & \underline { 110,000 } \\ \text { Segment margin } & \underline { 64,000 } & \underline { £ 14,000 } & \underline { £ 50,000 } \\ \text { Common fixed expenses } & \underline { 34,000 } & & \\ \text { Net operating income } & \underline { £ 30,000 } & & \end{array}\] - For each of the following questions, refer back to the original data. The marketing department believes that a promotional campaign at Store P costing £5,000 will increase sales by £15,000. If the campaign is adopted, overall company net operating income should

A) decrease by £800. B) decrease by £5,800. C) increase by £5,800. D) increase by £10,000. A) decrease by £800. B) decrease by £5,800. C) increase by £5,800. D) increase by £10,000.