Question 1

SECTION B - MULTI-TASK QUESTION 3 (PERFORMANCE MEASUREMENT)

A global logistics provider operates an autonomous European division. 
Financial data for the year:
- Revenue: $5,000,000
- Controllable operating profit: $750,000
- Average divisional net assets: $3,000,000
- Cost of capital: 15%

Provide the following 5 answers (each worth 2 marks):
1. Calculate the Return on Investment (ROI) as a percentage.
2. Calculate the Residual Income (RI).
3. Calculate the Asset Turnover ratio (to two decimal places).
4. Calculate the Operating Profit Margin as a percentage.
5. If the division invests in a new project yielding an 18% return, state whether this will INCREASE or DECREASE the division's current ROI.

Accepted Answer

Use standard financial performance formulas. ROI = Profit / Net Assets. RI = Profit - (Net Assets * Cost of Capital). Asset Turnover = Revenue / Net Assets. Margin = Profit / Revenue.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Stating the new project will INCREASE ROI because 18% > 15% cost of capital. It increases RI, but decreases ROI.

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA MA — Management Accounting Practice Exam 4

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