Lecture 5 Flashcards
(7 cards)
What does decentralisation?
Decentralisation = letting different parts of the company make their own decisions
What is
1. Cost centre
2. Revenue centre
3. Profit centre
4. Investment centre
- Cost centre = spends money
- Revenue centre = brings in money
- Profit centre = earns and spends
- Investment centre = buy things , sells and grows
What is return on investment ( ROI)
What about the higher the ROI?
( Operating profit / capital employed ( investment ) )x 100
Has to be percentage
Operating = how much money you make from running the business ( after paying electricity and workers )
Capital employed = the total money used to run the business. ( buildings and machines )
Higher the ROI= better the performance
E.g : ROI
TRC division is making 82,000 profit with 500,000 investment
- company ants 15% ROI
- manager is thinking of spending 100,000 more to make 17,000 more profit
What if has less profit instead of making 17,000 it only made 16,000
Current ROI : 82,000 / 500,000 x 100=16.4
Then invesnt
82,000 + 17,000 =99,000 new profit
500,000 + 100,000=600,000
99,000 / 600,000 x 1000=16. 5%
- so it went up the ROI so that is good
Instead of 17,000 it only made 16,000
82,000 + 16,000=98,000
98,000 /600,000 x 1000=16.3 %
So ROI went down so NO
What are advantages and disadvantages of ROI? ( 1 each )
How do you increase ROI? ( 2 ways)
Advantage of ROI
1. Shows how well a manger uses their money
Disadvantage
1. Actually only care about short term scores
Increase ROI
1. Decrease assets = sell equipment not buy more
2. Increase revenue ( make more money
how do you workout RESIDUAL INCOME
Same examples as before
Or I gal
Profit 82,000
Investment is 500,000
Target rate : 15%
What are advantages and disadvantages ( 1 each )
Operating profit - ( target rate x capital employed )
82,000 - ( 15% x 500,000) = 7,000
Advantage : it encourages people to do good projects
Disadvantage = you can not compare to divisions easily because one might be bigger
How do you workout economic value added? (EVA )
E.g
Net profit after tax is 8.6 million
Cost included
- interest 2.3 million
- development cost 6.3 million ( product launched in may 2017 however was used for 1 year )
- adversting 1.6 million launch in June
Capital invested 30 million
Cost of capital = 13%
Net operating operating profit after tax ( adjusted ) - (capital x cost of capital )
Capital and cost of capital is always given
- we need to adjust net operating profit
For e.g you add
- Interest (2.3)
- for any development cost make sure you figure how long you are benefiting or using it and then add that figure ( 6.3 x 1/3 =2.1
6.3-2.1=4.2 ( make sure you add 4.2
- ignore anything that includes next year business ( ignore advertising )
Capital invested 30 x cost of capital 13= 3.9 million
8.6 + 2.3+ 4.2=15.1
Net profit 15.1 - 3.9=11.2
