Performance Management · May 2026

ai. Determination of expected selling price for each product Product E Product P Product D Product S Amt Pr EV Amt Pr EV Amt Pr EV Amt Pr EV 800 0.5 400 500 0.3 150 900 0.2 180 850 0.5 425 700 0.3 210 540 0.5 270 800 0.3 240 750 0.3 225 600 0.2 120 600 0.2 120 700 0.5 350 650 0.2 130 Selling Price = N730 Selling Price = N540 Selling Price = N770 Selling Price = N780

ii. Determine the unit variable cost of each product Since the Products use the same materials, Labour and overheads Computing the variable cost Using High – Low method: Cost Item Cost of Highest Quantity Cost of Lowest Quantity Cost Difference Difference between High and Low quantities Variable cost = Cost Difference /Difference in Quantity Material 8,400,000 4,400,000 4,000,000 40,000 – 20,000 = 20,000 N200 Labour 3,800,000 2,000,000 1,800,000 40,000 – 20,000 = 20,000 N90 Overhead 2,800,000 1,600,000 1,200,000 40,000 – 20,000 = 20,000 N60 Variable costs for each Product Cost Element Product E Product P Product D Product S N N N N Material 200 200 200 200 Labour 90 90 90 90 Overhead 60 60 60 60 Total unit Variable cost 350 350 350 350

b. Profit Statement (Marginal Costing Approach) Particulars Product E Product P Product D Product S Total Units 20,000 24,000 36,000 40,000 Sales 14,600,000 12,960,000 27,720,000 31,200,000 86,480,000 Variable 7,000,000 8,400,000 12,600,000 14,000,000 42,000,000 70 cost Contribution 7,600,000 4,560,000 15,120,000 17,200,000 44,480,000 Fixed Overead 1,000,000 1,000,000 1,000,000 1,000,000 4,000,000 Attributable Profit 6,600,000 3,560,000 14,120,000 16,200,000 40,480,000 Profit margin 45.20% 27.469% 50.94% 58.441% General Fixed overhead 21,665,000 Net Profit N18,815,000 All the 4 products achieved 25% profit margin or more benchmark. Computation of fixed costs N Material: Total cost @ 20,000 units = 4,400,000 Variable cost (N200 x 20,000) 4,000,000 Material Fixed cost 400,000 Labour: Total cost @ 20,000 units = 2,000,000 Variable cost (N90 x 20,000) 1,800,000 Labour Fixed cost 200,000 Overhead: Total cost @ 20,000 units = 1,600,000 Variable cost (N60 x 20,000) 1,200,000 Overhead Fixed cost 400,000 Total Fixed Overhead 1,000,000

c. Effect on Company’s Net Profit:

i. If Product D is discontinued: Particulars Product E Product P Product S Total Units 20,000 24,000 40,000 Sales 14,600,000 12,960,000 31,200,000 58,760,000 Variable cost 7,000,000 8,400,000 14,000,000 29,400,000 Contribution 7,600,000 4,560,000 17,200,000 29,360,000 Fixed Overead 1,000,000 1,000,000 1,000,000 3,000,000 Attributable Profit 6,600,000 3,560,000 16,200,000 26,360,000 Less General fixed cost 21,665,000 Net Profit 4,695,000

ii. If D is discontinued and P sales decreased by 4,000 units: Particulars Product E Product P Product S Total Units 20,000 20,000 40,000 Sales 14,600,000 10,800,000 31,200,000 56,600,000 Variable cost 7,000,000 7,000,000 14,000,000 28,000,000 71 Contribution 7,600,000 3,800,000 17,200,000 28,600,000 Fixed Overead 1,000,000 1,000,000 1,000,000 3,000,000 Attributable Profit 6,600,000 2,800,000 16,200,000 25,600,000 Less General fixed cost 21,665,000 Net Profit 3,935,000

iii. Where Product D selling Price increased to N860 and quantity decreased to 30,000 units: Particulars Product E Product P Product D Product S Total Units 20,000 24,000 30,000 40,000 Selling Price N730 N540 N860 N780 Sales 14,600,000 12,960,000 25,800,000 31,200,000 84,560,000 Variable cost 7,000,000 8,400,000 10,500,000 14,000,000 39,900,000 Contribution 7,600,000 4,560,000 15,300,000 17,200,000 44,660,000 Fixed Overead 1,000,000 1,000,000 1,000,000 1,000,000 4,000,000 Attributable Profit 6,600,000 3,560,000 14,300,000 16,200,000 40,660,000 Less General Fixed Cost 21,665,000 Net Profit 18,995,000

iv. Where Product E is increased by 10,000 units to be sold at N500 each and additional Labour cost at N60 for each additional unit. Particulars Product E Product P Product D Product S Total Units 20,000 24,000 36,000 40,000 Selling Price N730 N540 N770 N780 Sales 14,600,000 12,960,000 27,720,000 31,200,000 86,480,000 Variable cost 7,000,000 8,400,000 12,600,000 14,000,000 42,000,000 Contribution 7,600,000 4,560,000 15,120,000 17,200,000 44,480,000 Fixed Overead 1,000,000 1,000,000 1,000,000 1,000,000 4,000,000 Attributable Profit 6,600,000 3,560,000 14,120,000 16,200,000 40,480,000 Net Returns on Additional Uints revenue (N500 - N410) 900,000 900,000 7,500,000 3,560,000 14,120,000 16,200,000 41,380,000 72 Less General fixed cost 21,665,000 Net Profit 19,715,000

v. If Product E is reduced to 10,000 units and sold at N800 each and Product S is increased to 50,000 units and sold at N700 per unit Particulars Product E Product P Product D Product S Total Units 10,000 24,000 36,000 50,000 Selling Price N800 N540 N770 N700 Sales 8,000,000 12,960,000 27,720,000 35,000,000 83,680,000 Variable cost 3,500,000 8,400,000 12,600,000 17,500,000 42,000,000 Contribution 4,500,000 4,560,000 15,120,000 17,500,000 41,680,000 Fixed Overead 1,000,000 1,000,000 1,000,000 1,000,000 4,000,000 Attributable Profit 3,500,000 3,560,000 14,120,000 16,500,000 37,680,000 Less General Fixed cost 21,665,000 Net Profit 16,015,000

d. Limitations of sensitivity analysis:

• No probability insight or probability of likely occurrence;

• Variables are static and may be misleading;

• Ignores variability interaction hence one variable focused;

• Oversimplifies extreme risk; and

• Sustains garbage in Garbage out in cost.

Examiner’s report This is a compulsory question under the new syllabus which test candidates’ ability in using marginal costing approach in preparing profit statement. It also dwells on expected value computation for selling prices, use of high-low methods in cost separation into variable and fixed costs, and application of sensitivity analysis in decision making. The question was well attempted and the candidates’ performance was however average. The major pitfall was the candidates’ inability to decipher the sensitivity issues in part (c) iii to v. It is hereby recommended that candidates use ICAN Study Text and other Performance Management text books in preparing for future Institute’s examinations. 73

Marking guide Sect. Description Marks Marks Marks ai. 4 ticks = 3 marks 3 ii. 3 ticks = 3 marks 3 6

b. 35 ticks = 5 marks 5

ci. 3 ticks = 3 marks 3 ii. 3 ticks = 3 marks 3 iii. 3 ticks = 3 marks 3 iv. 3 ticks = 3 marks 3 v. 4 ticks = 4 marks 4 16

d. 3 ticks = 3 marks 3 30

Viana Nig. Oil palm Processing Plant

a. The basic concept of a learning curve is that the more a particular task is performed the more proficient the individual becomes and, as a consequence, the time taken decreases. In the initial stages, the learning effect is substantial leading to marked decreases in time. In latter stages, however, the individual becomes more familiar with the task and the rate of learning slows down. This effect is captured in a relationship between the average time taken per unit and the cumulative number of units produced (or task repetitions). The form of this relationship is usually taken to be geometric (or logarithmic) as given by: Y = axb where Y = average labour hours for the output level desired X = B = 83.

b. Estimation of Rate of Learning: From the data, the cumulative number of shut-downs (x) and the average cost of shut down (y) are as follows: Quarter Shut-Down Cost (N) I 720,000 2 576,000 3 540,000 4 540,000 Cumulative Cumulative Average Number Costs (N) Costs (N) (X) (Y) I 720,000 720,000 2 1,296,000 648,000 74 3 1,836,000 612,000 4 2,376,000 594,000 When X, doubles from I to 2, then y decreases by a factor 648,000/720,000 = 0.90. When X again doubles from 2 to 4, Y deceases by 594,000/648,000 = 0.9167. It is therefore clear that the learning rate is about 90.8%.

c. Forecast of total cost in the coming year: At the end of the second year, the plant would have been shut-down 8 times (8 quarters). Qtr 4 average cost is ₦594,000 ₦ :. Qtr 8 average cost = 90.8% of ₦594,000 = 539,352 Total costs over 8 quarters = N539,352 × 8 = 4,314,816 Less: Total cost during first year = 2,376,000 Total costs during second year 1,938,816

d. Forecast of total cost of shut down after cessation of learning in the 3rd Year: If learning ceases at the end of quarter 8, the cost applicable for quarter 8 (not the average cost after 8 shut-downs) will apply in all subsequent quarters.

* Determine the total costs after 8 shut-downs - determined in (c) above as ₦4,314,816

* Determine the total costs after 7 shut-downs: ** Average costs after 7 shut-downs by formula: Y = 720,000 (1) Log0.908/Log 2 Y = 720,000(7)-0.1392= ₦549,155 ** Total costs after 7 shut-downs = 7 x 549,155 = ₦3,844,084 * Cost for quarter 8 is ₦4,314,816 -3,844,084 = ₦470,732 This is the cost that will apply per quarter subsequently in the absence of learning. Thus the cost of shut-down during the third year will be: 4 quarters x ₦470,732 = ₦1,882,928.

e. Two specific problems are:

i. No allowance seems to have been made for inflation; and ii. As the plant gets older, maintenance costs would be expected to rise. This factor has not been taken into account. 75

Examiner’s report The question test candidates’ understanding of learning curve theory and computation of associated shut down costs, especially where the fourth quarter cost is the same as the third quarter cost. The question was averagely attempted, however, the performance of candidates was below average. The major pitfall observed was inability of candidates to understand fully that irrespective of the figures presented in the cost data, the learning curve principles must be used to compute the required solutions as stated in the question. It is hereby recommended that candidates use ICAN Study Text and other approved text books on Performance Management when preparing for future Institute’s examinations.

Marking guide Section Description Marks Marks

a. Explanation of learning curve concept 4

b. Rate of Learning = 4 ticks = 4 marks 4

c. Total cost of shut down for coming year (4 Quarters) 4

d. Total shutdown cost for 3rd year. 4

e. 2 specific reasons why this forecast may be wrong (2 ticks = 4 marks) 4 20

a. The costs of quality fall into four categories

i. Prevention costs – costs incurred to preclude the production of products that do not conform to specifications. Examples include:

• Quality training;

• Testing of new materials;

• Supplier evaluation;

• Preventive equipment maintenance;

• Extra purchase price of higher quality materials;

• Design engineering; and

• Process engineering

ii. Appraisal costs – costs incurred to detect which of the individual units of products do not conform to specifications. Examples include:

• Inspection of goods received; 76

• Product testing;

• Inspection of part-finished production, i.e. work-in-progress; and

• Inspection of finished output.

iii. Internal failure costs – costs incurred on defective products before they are shipped to customers. Examples include:

• Spoilage;

• Rework;

• Scrap; and

• Staff waiting time and machine downtime due to disruption of workflows caused by defective materials and part-finished products.

iv. External failure costs – costs incurred on defective products after they are shipped to customers. Examples include:

• Warranty repair costs;

• Liability claims;

• The replacement of failed products;

• The cost of handling complaints; and

• Additional transport costs Appraisal and prevention costs are sometimes known as the cost of conformance (for goods) or the costs of compliance (for services). Internal and external failure costs are the costs of non-conformance or non-compliance.

b. Cost of quality report for the year ended 31 August 2024 S/n Particulars Quantity Rate (₦) Amount N’000 %

a. Preventive Costs Design Engineering 132,000 1,500 198,000 11.89 Training 6,000 0.36 Sub-total 204,000 12.25

b. Appraisal Cost Inspection (Manufacturing) 432,000 800 345,600 20.75 Product Testing 1,960 0.12 Sub-total 347,560 20.87

c. Internal Failures Rework (Manufacturing) 3,000 60,000 180,000 10.80 Sub-total 180,000 10.80

d. External failures Customer support (Marketing) 3,600 4,000 14,400 0.87 Transportation (Distribution) 3,600 4,800 17,280 1.04 77 Warranty repairs 3,600 64,000 230,400 13.83 Publicity costs 2,800 240,000 672,000 40.34 Sub-Total 934,080 56.08 Grand Total costs 1,665,640 100%

Examiner’s report This question tests candidates’ knowledge of classification of cost of quality and its computation. The question was well attempted and performance was above average. The major pitfall observed was candidates’ inability to compute cost of quality using appropriate sub-headings. It is hereby recommended that candidates use ICAN Study Text on Performance Management when preparing for future Institute’s examinations.

Marking guide Section Description Marks Marks

a. 4 classification = 6 marks 6

b. 42 ticks = 14 marks 14 20

Oforma Nigeria Limited

a. Optimal transfer price or price range for product B Since the only consumer of Mat-R is Enugu Division, the minimum transfer price should be set at marginal cost less any cost savings due to internal sales. The variable cost per unit of product Mat-R is N480, hence the minimum transfer price should be set at N480 per unit of Mat-R. The maximum transfer price per unit for Mat-R would be the price that the external supplier charges Enugu Division, which is N550. Hence, the optimal transfer price per unit would lie between a minimum of N480, and a maximum of N550.

b. Optimal transfer price for product b if there is spare capacity If Lagos Division has spare production capacity, then the units of product Mat-R have no opportunity cost and should be transferred to Enugu Division at variable cost less any cost savings due to internal sales. The transfer price would therefore be N480 per unit. 78

c. Optimal transfer price for product mat-R if Lagos division operates at full capacity If Lagos Division is at full capacity and would forego sales of product Gat-R to supply product Mat-R to Enugu Division, then the units of product Mat-R would have to be transferred at marginal cost less any cost savings plus the contribution forgone on sales of product Gat-R. The contribution per unit of Gat-R is N160 (i.e. N620 – N460). Thus, the optimal transfer price would be N480 + N160 = N640.

d. Method of Divisional Performance Appraisal Methods for divisional performance appraisal include Return on Investment (ROI), Residual Income (RI), and absolute divisional profit. These methods measure a division's profitability by relating its operating profit (often controllable profit) to the capital it employs (investment) or a target percentage of capital. Other factors, such as profit to sales ratio and value based management metrics, most often referred to economic added value (EVA) can also be used to assess divisional performance. These can further be explained thus: Return on Investment (ROI): This method calculates the division's profit as a percentage of the capital it uses. This is calculated as follows: (Net Profit divided by capital employed) x 100%. It provides a standardised measure for comparing divisions, even those of different sizes. Residual Income (RI): This method measures the profit remaining after charging an imputed interest or capital cost on the capital employed. This is calculated thus: Residual Income = Net Profit – (Imputed Interest Rate x Capital Employed). It encourages investments that yield a positive residual income, leading to a more comprehensive assessment of divisional profitability beyond just ROI. Absolute Divisional Profit: This method focuses solely on the total profit generated by the division, often after considering controllable costs. Economic value added (EVA): EVA (Economic Value Added) is a measure of a company's true economic profit, calculated by subtracting the cost of all capital (debt and equity) from its after-tax operating profit. It serves as a performance metric for a company to evaluate management's effectiveness, a tool for strategic decision making to identify value-creating investments, and a way to communicate value creation to investors and shareholders.

Examiner’s report The question tests candidates’ understanding of transfer pricing issues in operating divisions under situations where spare production capacity is available and also where divisions operate at full capacity, even though there exist limited resources like direct labour. 79 The question was well attempted and performance was above average. The major pitfall observed was candidates’ inability to decipher the transfer pricing implication in a situation where there is limited availability of direct labour and generating its implication on unsatisfied external demand for Gat-R. It is hereby advised that candidates use ICAN Study Text on Performance Management when preparing for future Institute’s examinations.

Marking guide Section Description Marks Marks

a. Optimal transfer price 4

b. 2 ticks = 4 marks 4

c. 3 ticks = 7 marks 7

d. Two methods of divisional performance evaluation 5 20

Particulars Process 1 Process 2 Process 3 Process 4 Process 5 Input 80,000 Total 80,000 Output (To Processes 2,3,4,5) 70,000 22,000 20,000 10,000 18,000 Normal Loss (10%) 8,000 Abnormal loss 2,000 Output 80,000 22000 20,000 10,000 18,000 Computation of Process 1 costs: Input: Qty Unit cost Total cost (N) Material 80,000 125 10,000,000 Labour 4,800,000 Prod. Overhead 360,000 (4,800,000 /8,800,000) x ₦660,000 Total 80,000 15,160,000 Input: Qty Total cost (N) Normal Loss 8,000 400,000 Abnormal loss 2,000 410,000 Process 2 Pat 22,000 4,510,000 Process 3 Pet 20,000 4,100,000 Process 4 Pan 10,000 2,050,000 Process 5 Pea 18,000 3,690,000 Total 80,000 15,160,000 80 Computation of cost of good units/Abnormal Loss: Cost Per good unit = (15,160,000 – 400,000)/ (80,000 – 8000) = N14,760,000 72,000 = ₦205/Kg 1st Production and Sales strategy: Sales at Split off point: Product Quantity Cost at Sales value at Split- Off Net Profit Split-off Point (Sales) Unit S.P Costs Unit Sales N’000 N’000 N’000 Pat 22,000 205 4,510 250 5,500 990 Pet 20,000 205 4,100 280 5,600 1,500 Pan 10,000 205 2,050 120 1,200 (850) Pea 18,000 205 3,690 300 5,400 1,710 Total 14,350 17,700 3,350 Less Prod. Costs (Bal.) 300 Net Profit 3,050 2nd Production and Sales Strategy : If Products are Processed further : Particulars PAT PET PAN PEA TOTAL (N) Quantity 22,000 20,000 10,000 18,000 Total Sales 8,800,000 6,000,000 2,000,000 9,000,000 25,800,000 Material Pro.1 4,510,000 4,100,000 2,050,000 3,690,000 14,350,000 Direct wages 1,200,000 800,000 400,000 1,600,000 4,000,000 Prod. OH (Bal.) 90,000 60,000 30,000 120,000 300,000 Total cost 5,800,000 4,960,000 2,480,000 5,410,000 18,650,000 Net Profit 3,000,000 1,040,000 (480,000) 3,590,000 7,150,000

NOTE: The Abnormal loss cost will include N10,000 Production cost. 2000/72000 x N360,000 = N10,000.That is the difference between Prod. OH cost of N660,000 and N650,000. Comparative appraisal of two alternative Production Strategies Alternative Production Strategy PAT PET PAN PEA Prod. OH Total net Profit (₦) Profit at Sales at Split off Point 990,000 1,500,000 (850,000) 1,710,000 300,000 3,050,000 Profit after further Processing 3,000,000 1,040,000 (480,000) 3,590,000 - 7,150,000 81 Though the two strategies have individual effect on product profitability but Sales at split off point generated ₦3,050,000 which is lower than profit of ₦7,150,000 generated after further processing. Hence it might be advisable for sale after further processing.

Examiner’s report The question test candidates’ ability to provide solutions on issues relating to advanced process costing, and associated profitability impact on alternative production strategies such as:

• selling of process products at point of spilt-off; and

• after further processing of such products. The question was averagely attempted and performance was average. The observed pitfalls were:

• the candidates were unable to determine the quantity of input material from where the normal loss of 10% was computed;

• the candidates’ inability to treat abnormal loss appropriately;

• the candidates’ inability to determine the total cost of process 1 outputs (Pat, Pet, Pan and Pea) which must take into account the revenue derived from the scrap value of sale of normal loss; and

• the failure on the part of candidates to highlight in comparative manner the profitability of the products and company under the two production strategies. It is hereby advised that candidates use ICAN Study Text on Performance Management when preparing for future Institute’s examinations.

Marking guide Description Marks 60 ticks = 15 marks 15

ABAYOMI PLC

a) When dealing with multi-products, the breakeven point in units is given by: BEP (Units) = Fixed cost = FC Weighted Contribution WC Where WC = Weighted Contribution per unit and FC = Total fixed costs The WC is calculated using units sold and not sales revenue. The budgeted sales in units are 690: Units Ratio Product A: ₦8,400,000 ÷ ₦120 = 70,000 = 1 B: ₦25,200,000 ÷ ₦180 = 140,000 = 2 210,000 = 3 82 This weighted contribution per unit is computed as follows: A B N N Selling price 120 180 Less variable costs 64 76 Contribution per unit 56 104 Weight by quantities 1/3 2/3 Weighted Contribution/unit = (56 x 1) + (104 × 2) = 56 + 208 = 264/ 3 = N88 Fixed costs: N Production overheads 2,240,000 Selling and adm. Overheads 8,320,000 Total fixed costs (FC) 10,560,000 BEP (units) = FC Weighted Contribution = Total fixed costs/ Weighted contribution per unit = 10,560,000 / N88 = 120,000 units, made up of: Product A = 1/3 × 120,000 = 40,000 units B = 2/3 × 120,000 = 80,000 units

bi. We first determine the revised weighted contribution margin ratio (WCMR) A B ₦ ₦ Direct materials* 28.80 28.80 Direct labour 17.60 26.40 Variable overheads 16.00 16.00 Total variable costs per unit 62.40 71.20 Selling price 120.00 160.00 Contribution per unit 57.60 88.80 Contribution margin ratio 0.48 0.555 Sales A = ₦8,400,000 = 20% Sales B = ₦8,400,000 x 0.8/0.2 = ₦33,600,000 = 80% Total Sales ₦42,000,000 Sales in Units: A: ₦8,400,000 /₦120 = 70,000 units = 25% B: ₦33,600,00 0/₦160 = 210,000 units = 75% Weighted contribution per unit (.25x57.60)+(0.75 x 88.80) =14.4 + 66.6 = ₦81 BEP (units) = Fixed Overhead = 2,240,000+ 8,320,000 + 456,000 = 11,016,000/₦81 = 136,000 units A: 0.25 x 136,000 = 34,000 units B: 0.75 x 136,000 = 102,000 units 83

ii. WCMR The weighted contribution margin ratio (WCMR = weighted contribution margin ratio) (WCMR) must be based on sales revenue as detailed below: Product A Sales Revenue: A: ₦8,400,000 /₦120 = 70,000 units = 25% B: ₦33,600,00 0/₦160 = 210,000 units = 75% WCMR = Contribution margin ratio = A: 57.6/120 = 0.48 B = 88.80 /160) = 0.555 BEP (₦) = ₦10,560,000+ ₦456,000 = ₦11,016,000/ = A: Sales ₦8,400,000 = 0.2 B: Sales ₦33,600,000 = 0.8 Weighted contribution margin using the Sales revenue = (0.48 x 0.2 )+ (0.555 x 0.8) = 0.096 + 0.444 = 0.54 Company Sales at BEP = ₦11,016,000 / 0.54 = ₦20,400,000 Shared: A = 0.2 x 20,400,000 = N4,080,000 B = 0.8 x 20,400,000 = N16,320,000

c. Profit after tax, as a percentage of revenue = ? Let ₦x = the required revenue. Profit after Tax = 0.12x = 1-0.40 = 0.60 Profit Before Tax = 0.12x divided by 0.60 = 0.20 or 20% Total contribution = Fixed overhead + Profit before tax New sales to achieve the returns after tax = Fixed Cost + PBT = 0.54 X Using: Sales (₦) = Total fixed cost+ Profit WCMR , or x = 11,016,000+0.20x 0.54 0.54 x = 11,016,000 + 0.20x 0.34x = 11,016,000 x = ₦32,400,000 Product A = 20% of N32,400,000 = N6,480,000 B = 80% of N32,400,000 = N25,920,000 Total Sales N32,400,000 Check Company Sales ₦32,400,000 1.00 Variable cost 14,904,000 0.46 84 Contribution 17,496,000 0.54 Fixed 11,016,000 Profit before Tax 6,480,000 Tax (0.4) 2,592,000 Profit after tax 3,888,000 = 12% of Sales

Examiner’s report The question test candidates’ ability to determine the breakeven points in sales value and quantities in multi-product situation. It also tests candidates’ ability to compute the breakeven points when sensitivity issues are involved. The question was well attempted and performance was above average. The major pitfall observed was candidates’ inability to compute the ratio required for the determination of breakeven points in sales value for multi-products situation. It is hereby advised that candidates use ICAN Study Text on Performance Management when preparing for future Institute’s examinations.

Marking guide Section Description Marks Marks

a. Breakeven point for the company in units (18 ticks = 3 marks) 3

b. Breakeven point for the company in units and value (36 ticks = 4 marks) 4

c. Computation of revenue to earn an after tax return of 12% (16 ticks = 8 marks) 8 15

ai. Economic value added (EVA): EVA (Economic value added) is a measure of a company's true economic profit, calculated by subtracting the cost of all capital (debt and equity) from its after-tax operating profit. It serves as a performance metric for a company to evaluate management's effectiveness, a tool for strategic decision making to identify value-creating investments, and a way to communicate value creation to investors and shareholders.

ii. An investment centre is a division within a company responsible for its own revenues, expenses, and the assets it controls to generate profits. Unlike a profit center, which focuses only on revenues and expenses, an investment center's performance is evaluated on its ability to earn a return on the assets it 85 has invested in. Common metrics for, assessing investment centers include return on investment (ROI) and residual income (RI), which measure how effectively the division uses capital to produce profits.

iii. Return on investment (ROI) is a profitability ratio that measures the gain or loss generated from an investment relative to its cost, typically expressed as a percentage. The basic formula is (Net profit / Cost of investment) x 100. A higher ROI indicates a more efficient and profitable investment, making it a key tool for evaluating investment performance, comparing different opportunities, and making informed financial decisions.

bi. Nwakaego and Sons Limited N Lagos Kano Gombe Enugu Total N’000 N’000 N’000 N’000 N’000 Sales revenue 1,200 2,600 2,200 2,780 8,780 Variable costs 700 1,300 1,050 1,500 4,550 Contribution 500 1,300 1,150 1,280 4,230 Fixed cost 178 385 326 411 1,300 Net profit 322 915 824 869 2,930 Return on investment 12.88% 30.50% 29.43% 32.19% 26.64% Investment costs 2,500 3,000 2,800 2,700 11,000 Using the return on investment (ROI) as a basis of appraisal shows that the profit in relation to the investment of the centres, Enugu centre achieved a higher ROI than other centres while Lagos centre achieved the lowest ROI. Residual income Lagos Kano Gombe Enugu Total N’000 N’000 N’000 N’000 N’000 Investment Capital 2,500 3,000 2,800 2,700 11,000 Net profit 322 915 824 869 2,930 imputed cost 187.5 225 210 202.5 825 Residual Income 134.5 690 614 666.5 2,105 Using the residual income (RI) basis, which is the operating income less imputed cost on investment capital, Kano achieved a higher Residual income while Lagos got the lowest residual income.

ii. Re-evaluate the residual income situation of the company given that the cost of capital is 10%. N Total investment capital for the company 11,000,000 Total profit of the company 2,930,000 Imputed cost on investment @ 10% 1,100,000 Residual Income 1,830,000 86 There is a diminution in the company’s residual income by ₦275,000 (₦2,105.000 less ₦1,830,000) due to increase in imputed cost on company investment from 7.5% to 10%. This reduction will not throw any of the divisions into negative residual income as that will result in the following: Lagos Kano Gombe Enugu Total N’000 N’000 N’000 N’000 N’000 Investment capital 2,500 3,000 2,800 2,700 11,000 Net profit 322 915 824 869 2,930 imputed cost (10%) 250 300 280 270 1,100 Residual income 72 615 544 599 1,830 Kano division sustained leadership on the residual income basis.

Examiner’s report The question test candidates’ ability to determine the breakeven points in sales value and quantities in multi-product situation. It also tests candidates’ ability to compute the breakeven points when sensitivity issues are involved. The question was well attempted and performance was above average. The major pitfall observed was candidates’ inability to compute the ratio required for the determination of breakeven points in sales value for multi-products situation. It is hereby advised that candidates use ICAN Study Text on Performance Management when preparing for future Institute’s examinations.

Marking guide Section Description Marks Marks Marks

ai. Economic value added 2

ii. Investment centre 2

iii. Return on investment (ROI) 2 6

bi. Performance of the divisions using ROI (24 tick = 3 marks) 3

ii. Performance of the divisions using Residual Income (24 tick = 3 marks) 3 Iii Reevaluation the company performance at capital cost of 10% using the residual income method. (12 ticks = 3 marks) 3 9 15 87