Question

5.5 Determine the Direct Labour Rate Varlance 15 TOTAL MARKS FOR QUESTION 5 QUESTION 6 (10 MARKS, 18 MINUTES) River Basin Limited has two branches, in Rundu and Otavi. The following information relates to Rundu branch. 792 000 Sales ROI Branch assets Operating income 2.2 Assets turnover ? Residual income 13% Operating profit margin 18% Corporate desired rate of return 8

Required for Question 6

(a) Calculate the missing figures

(b) How would you evaluate the branch manager's performance based on ROI

(C) Assuming that Corporate tax is 28%, and the desired rate of return is equal to weighted average cost of capital, calculate EVA for Rundu branch

Answer 1

Branch Assets = Sales Asset turnover Branch Assets = Sales ROI Branch Assets Operating income Assets turnover Residual income Operating Profit margin Corporate desired rate of return 792,000.00 28.60% 360,000.00 102,960.00 2.2 38,160.00 13% 18% 792,000.00 2.20 Branch Assets = 360,000.00 Operating Income = Operating Income = Operating Income = Sales*Operating Profit margin 792,000 * 13% 102,960.00 ROI = Operating Income Branch Assets ROI = 102,960.00 360,000.00 ROI = 28.60% Residual Income = Residual Income = Residual Income = Branch Assets(ROI - Corporate desired rate of return) 360000(28.6% - 18%) 38,160.00

B. Evaluation ofperformance of Branch manager As ROI of the branch is greater than Corporate desired rate of return His performance if much better than the industry. C. EVA EVA = EVA = EVA = NOPAT - Capital invested*WACC 74,131.2 - 360,000*18% 9,331.20 Net Operating profit after tax(NOPAT) = Net Operating profit after tax(NOPAT) = 102,960(1 - .28) 74,131.20 Capital Invested = Capital Invested = Branch assets 360,000.00