elsen Lta has 2 divisions with the following information. Division A Division B

Question

elsen Lta has 2 divisions with the following information. Division A Division B Profit 80,000 12,000 Capital employed 320,000 100,000 12% ROCE 4% Division A has been offered a project costing $100,000 and giving returns of $20,000 Divisio s been offered a project costing $100,000 and giving returns of S 12,000. The company's cos pitals 15%. Divisional performance is Judged on ROCE and the ROCE-related bonus is sufficien igh to influence the managers' behaviour. Which of the following statements are TRUE? Select ALL that apply. (1)Both divisional managers should accept the project offered to them. If he/she acts in the b terests of their own division, only the manager of Division A will want to accept the project offer o him/her. vant to accept the project offered to him/her. will be made by both divisional managers. Division A should accept the project offered to him/her. (2) If he/she acts in the best interests of their own division, only the manager of Division B wi (3)ROCE is a good decision-making method and in this case, will guarantee that the correct decisio (4)lf managers want to act in the best interests of the business as a whole, only the manager o

Explanation / Answer

Here the ROCE of Division A is 4% while of Division B is 12%.
If the project costing $100,000 is offered to Division A then it will give returns of $20,000
If the project costing $100,000 is offered to Division B then it will give returns of $12,000.

The statements which fall true are:-
(2). If he/she acts in the best interest of their own divisions, only the manager of Division B will want to accept the project because this decision is based on the ROCE and ROCE of division B is higher than Division A.
(4). The managers want to act in the best interest of the business as a whole, only the manager of Division A should accept the project because it is providing higher returns in comparison of Division B. Acceptance of project by Division A will the benefit the business as a whole.

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