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Glasnost plc is a large business organised on divisional lines. Two typical divisions are East
and West. They are engaged in broadly similar activities and, therefore, central management
compares their results to help it to make judgements on managerial performance. Both divisions
are regarded as investment centres. A summary of last year’s financial results of the two divisions is as follows:
At the beginning of last year, West division incurred substantial expenditure on automated
production lines and new equipment. East has quite old plant. Approximately 50 per cent of the
sales revenue of East comes from internal transfers to other divisions within the business. These
transfers are based on an unadjusted prevailing market price. The inter-divisional transfers of
West are minimal.
Management of the business focuses on return on investment as a major performance
indicator. The required minimum rate of return is the business’s cost of capital of 10 per cent
(a) Compute any ratios (or other measures) that you consider will help in an assessment of
the costs and performance of the two divisions.
(b) Comment on this performance, making reference to any matters that give cause for concern
when comparing the divisions or in divisional performance generally.
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