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CIM Divitional Performance Bonus Question

The document discusses performance management in various companies, focusing on both financial and non-financial performance indicators. It highlights the assessment of business performance for a training provider and two divisions of a manufacturing company, emphasizing the use of ROI and the implications of managerial bonuses. Additionally, it explores the strengths and weaknesses of ROI and RI as performance assessment methods, suggesting the need for alternative measures to prevent dysfunctional behavior in decision-making.

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28 views2 pages

CIM Divitional Performance Bonus Question

The document discusses performance management in various companies, focusing on both financial and non-financial performance indicators. It highlights the assessment of business performance for a training provider and two divisions of a manufacturing company, emphasizing the use of ROI and the implications of managerial bonuses. Additionally, it explores the strengths and weaknesses of ROI and RI as performance assessment methods, suggesting the need for alternative measures to prevent dysfunctional behavior in decision-making.

Uploaded by

faith.dibaks
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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PM: PE R F OR MA N CE MA NA GE M E N T

Due to the nature of the business, non-financial performance indicators are also used to
assess performance, as detailed below.
20X9 20Y0
Percentage of students transferring to AT Co from another training provider 8% 20%
Number of late enrolments due to staff error 297 106
Percentage of students passing exams first time 48% 66%
Labour turnover 32% 10%
Number of student complaints 315 84
Average no. of employees 1,080 1,081
Required:
Assess the performance of the business in 20Y0 using both financial performance indicators
calculated from the above information AND the non-financial performance indicators
provided.
Note: Clearly state any assumptions and show all workings clearly. Your answer should be
structured around the following main headings: turnover; cost of sales; gross profit;
indirect expenses; net operating profit. However, in discussing each of these areas you
should also refer to the non-financial performance indicators, where relevant.
(Total: 20 marks)

328 CIM (DECEMBER 2015)


Cardale Industrial Metal Co (CIM Co) is a large supplier of industrial metals. The company is
split into two divisions: Division F and Division N. Each division operates separately as an
investment centre, with each one having full control over its non-current assets. In addition,
both divisions are responsible for their own current assets, controlling their own levels of
inventory and cash and having full responsibility for the credit terms granted to customers
and the collection of receivables balances. Similarly, each division has full responsibility for
its current liabilities and deals directly with its own suppliers.
Each divisional manager is paid a salary of $120,000 per annum plus an annual performance-
related bonus, based on the return on investment (ROI) achieved by their division for the
year. Each divisional manager is expected to achieve a minimum ROI for their division of 10%
per annum. If a manager only meets the 10% target, they are not awarded a bonus. However,
for each whole percentage point above 10% which the division achieves for the year, a bonus
equivalent to 2% of annual salary is paid, subject to a maximum bonus equivalent to 30% of
annual salary.
The following figures relate to the year ended 31 August 20X5:
Division F Division N
$000 $000
Sales 14,500 8,700
Controllable profit 2,645 1,970
Less: apportionment of Head Office costs (1,265) (684)
–––––– ––––––
Net profit 1,380 1,286
–––––– ––––––
Non-current assets 9,760 14,980
Inventory, cash and trade receivables 2,480 3,260
Trade payables 2,960 1,400

21 4 KA P L AN P U BLI S H IN G
CON S T RU C TE D R E S PON S E Q UE S TI ON S – S E CT ION C : S E C TI ON 3

During the year ending 31 August 20X5, Division N invested $6.8m in new equipment
including a technologically advanced cutting machine, which is expected to increase
productivity by 8% per annum. Division F has made no investment during the year, although
its computer system is badly in need of updating. Division F’s manager has said that they have
already had to delay payments to suppliers (i.e. accounts payables) because of limited cash
and the computer system ‘will just have to wait’, although the cash balance at Division F is
still better than that of Division N.

Required:
(a) For each division, for the year ended 31 August 20X5:
(i) calculate the appropriate closing return on investment (ROI) on which the
payment of management bonuses will be based. Briefly justify the figures used
in your calculations. Note: There are 3 marks available for calculations and
2 marks available for discussion. (5 marks)
(ii) Based on your calculations in part (i), calculate each manager’s bonus for the
year ended 31 August 20X5. (3 marks)
(b) Discuss whether ROI is providing a fair basis for calculating the managers’ bonuses and
the problems arising from its use at CIM Co for the year ended 31 August 20X5.
(7 marks)
(c) Briefly discuss the strengths and weaknesses of ROI and RI as methods of assessing
the performance of divisions. Explain two further methods of assessment of
divisional performance that could be used in addition to ROI or RI. (5 marks)
(Total: 20 marks)

329 SPORTS CO (SEPTEMBER/DECEMBER 2017)


Sports Co is a large manufacturing company specialising in the manufacture of a wide range
of sports clothing and equipment. The company has two divisions: Clothing (division C) and
Equipment (division E). Each division operates with little intervention from Head Office and
divisional managers have autonomy to make decisions about long-term investments.
Sports Co measures the performance of its divisions using return on investment (ROI),
calculated using controllable profit and average divisional net assets. The target ROI for each
of the divisions is 18%. If the divisions meet or exceed this target the divisional managers
receive a bonus.
Last year, an investment which was expected to meet the target ROI was rejected by one of
the divisional managers because it would have reduced the division’s overall ROI.
Consequently, Sports Co is considering the introduction of a new performance measure,
residual income (RI), in order to discourage this dysfunctional behaviour in the future. Like
ROI, this would be calculated using controllable profit and average divisional net assets.

KA P L AN P U BLI S H IN G 21 5

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