# Describe divisional organisational structure and critically analyse the advantages and disadvantages of divisionalisation

ACFI2208 UNIT TWO 2017/2018: ASSESSMENT TWO (25% of total module grade) The assignment is to be completed in groups of 2 or 3. Larger groups will not be permitted. The assignment brief and submission guidelines are detailed below. ASSIGNMENT BRIEF ANSWER ALL PARTS A AND B AND C PART A Describe divisional organisational structure and critically analyse the advantages and disadvantages of divisionalisation (use academic papers). Bounce Ltd. is a leading manufacturer and retailer of one type of product, ProdX. It has divided its operations into three divisions, i.e.: – Division A: supply rubber – Division B: compound rubber with chemicals to produce finished rubber – Division C: produce ProdX Division B has offered to buy 65,000 meters of rubber per annum from Division A at a price of £45 per meter. Although the total capacity of the Division A is 135,000 meters per annum, its normal production levels are 118,000 meters per annum. The production costs per meter (under normal production of 118,000 meter) of rubber are as follows: Direct material £17 Direct Labour £13 Variable Overheads £6 Fixed Overheads (i.e. Total Fixed Overheads/118,000) £17 Total £53 Division A has been selling its finished product, i.e. rubber, to outside buyers at £62 per meter. Division B has been buying rubber from outside suppliers at £59 per meter. Required: a) Presuming each divisional manager aims to optimise their division’s financial performance; discuss, with reason(s), whether the manager of Division A will accept a purchase offer of £45 per meter. Calculate the financial implication of accepting or rejecting the offer on Division A. (8 marks) b) Will the internal transfer result in a financial gain or loss for the company? Explain the reason(s) behind this gain or loss.

Calculate the financial implication of the internal transfer on Bounce Ltd. (8 marks) For parts a) and b) please use numerical evidence to justify your answer. c) If Division A has excess capacity show, with reasons, the maximum transfer price Division B would be willing to pay and the minimum transfer price Division A would be willing to accept. (8 marks) d) If Division A loses its excess capacity, will Bounce Ltd. benefit from future internal transfers? (4 marks) 3. Division C of Bounce Ltd. currently purchases a fixed quantity of finished rubber from Division B at a price of £76 per meter. The manager of Division B is considering the prospects of raising the prices of finished rubber from £76 per meter to £90 per meter; a proposal which is strongly opposed by Division C. Division C is able to purchase finished rubber at £80 per meter in the open market. The cost of production per meter in the Division B is as follows:- Direct Material £47 (Includes £44 paid to Division A + other direct material) Direct Labour £15 Variable Overheads £4 Fixed Overhead per meter £12 Total £78 If Division B stopped supplying rubber to Division C, they will be able to save one-fourth of the Fixed Overheads per meter. Currently Division B does not have any alternative use for it spare capacity. Required: a) Calculate the maximum transfer price Division C would be willing to pay and the minimum transfer price Division B would be willing to accept? (8 marks) b) From the perspective of Bounce Ltd., examine whether Division C should purchase steel from Division B or if it should purchase from the open market? (4 marks) [Part A Total 40 Marks] Part B Bounce Ltd. ProdX is sold through two other divisions i.e. North Division and South Division. These two selling divisions are treated as investment centres. Extracts from their financial statements are as follows: north devision south devision sales revenue £1,350,000 £1,600,000 total variable costs (£320,000) (£400,000) total fixed costs (£680,000) (£670,000) operating profits £350,000 £530,000 fixed assets £820,600 £870,000 inventory £85,300 £110,000 trade receivables £146,800 £260,000 total assets £1,052,700 £1,240,000 Required: Calculate Residual Income (RI) and Return on Investment (ROI) for the North division and South division. Briefly comment on the relative performance of the two divisions using the RI and ROI. Especially if the centre manager has responsibility in debt collection. You may assume the notional rate of interest is 10%. (5 marks) Describe the unique features of Residual Income, Return on Investment, Payback, Net Present Value and Internal Rate of Return in measuring financial performance. Critically analyse the strengths and weaknesses of each measure. Comment on the problems that may be involved in comparing divisional performance. Discuss the approaches that can be used to avoid dysfunctional behaviour which is motivated by accounting-based performance targets. (25 marks)