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Question: Sliced Bread plc is a divisionalized company.

Sliced Bread plc is a divisionalized company. Among its divisions are Grain and Bakery. Grain’s operations include granaries, milling and dealings in the grain markets; Bakery operates a number of bakeries. The following data relate to the year ended 30 November:
Sliced Bread plc is a divisionalized company. Among its divisions are Grain and Bakery. Grain’s operations include granaries, milling and dealings in the grain markets; Bakery operates a number of bakeries.
The following data relate to the year ended 30 November:


Divisional managements (DMs) are given authority to spend up to £20 000 on capital items as long as total spending remains within an amount provided for small projects in the annual budget. Larger projects, as well as sales of assets with book values in excess of £20 000, must be submitted to central management (CM). All day-to-day operations are delegated to DMs, whose performance is monitored with the aid of budgets and reports.
The basis for appraising DM performance is currently under review. At present divisions are treated as investment centres for DM performance appraisal, but there is disagreement as to whether return on capital employed or residual income is the better measure. An alternative suggestion has been made that DM performance should be appraised on the basis of controllable profit; this measure would exclude depreciation and gains or losses on sale of assets, treating investment in fixed assets as a CM responsibility. The cost of capital of Sliced Bread plc is 15 per cent per annum.

Requirements: 

(a). Calculate for both divisions the three measures (returnon capital employed, residual income and controllable profit) which are being considered by Sliced Bread plc, and state any assumptions or reservations about the data you have used in your calculations. 
(b). Examine the merits and problems of Sliced Bread plc’s three contemplated approaches to DM performance appraisal, and briefly suggest how CM could determine the required level of performance in each case. 
(c). Discuss briefly whether further measures are needed for the effective appraisal of DM performance.

Divisional managements (DMs) are given authority to spend up to £20 000 on capital items as long as total spending remains within an amount provided for small projects in the annual budget. Larger projects, as well as sales of assets with book values in excess of £20 000, must be submitted to central management (CM). All day-to-day operations are delegated to DMs, whose performance is monitored with the aid of budgets and reports. The basis for appraising DM performance is currently under review. At present divisions are treated as investment centres for DM performance appraisal, but there is disagreement as to whether return on capital employed or residual income is the better measure. An alternative suggestion has been made that DM performance should be appraised on the basis of controllable profit; this measure would exclude depreciation and gains or losses on sale of assets, treating investment in fixed assets as a CM responsibility. The cost of capital of Sliced Bread plc is 15 per cent per annum. Requirements: (a). Calculate for both divisions the three measures (returnon capital employed, residual income and controllable profit) which are being considered by Sliced Bread plc, and state any assumptions or reservations about the data you have used in your calculations. (b). Examine the merits and problems of Sliced Bread plc’s three contemplated approaches to DM performance appraisal, and briefly suggest how CM could determine the required level of performance in each case. (c). Discuss briefly whether further measures are needed for the effective appraisal of DM performance.





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Grain Bakery (£000) (£000) Sales 44000 25900 Gain on sale of plant 900 44000 8700 26800 Direct labour 7950 Direct materials 25600 10200 Depreciation 700 1100 Divisional overhead 5300 4550 Head office costs (allocated) 440 268 40740 24068 Fixed assets (at cost less accumulated depreciation) 7000 9000 Stocks 6350 1800 Trade debtors 4000 2100 Cash at bank 1500 Bank overdraft 750 Trade creditors 3000 2150



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