The Glass division has a budgeted net profit before tax of R4 200 000 per annum based on net capital employed of R3 800 000. The division’s cost of capital is 15% before tax. The target return on capital employed is 20%. The management of Glass are considering the expansion of its facility in order to cope with forecasted demand from a new customer. The customer is prepared to offer a three year contract providing Glass with annual sales of R1 500 000. To meet the contract, a total capital outlay of R1 200 000 is expected, comprising of R950 000 for the new machinery plus R250 000 for working capital. The machinery is expected to have a useful life of three years. Operating costs are expected to be R840 000 per annum, excluding depreciation. Required: Calculate the impact of accepting the contract with the customer on divisional return on capital employed (ROCE) and residual income (RI), assuming that the annuity depreciation method is used on the newly acquired machinery. The annual repayment is R416 078.11. Round your answers to two decimal places, where applicable. Once calculated, recommend to management whether the contract should be accepted or not.
The Glass division has a budgeted net profit before tax of R4 200 000 per annum based on net capital employed of R3 800 000. The division’s cost of capital is 15% before tax. The target return on capital employed is 20%.
The management of Glass are considering the expansion of its facility in order to cope with
Required:
Calculate the impact of accepting the contract with the customer on divisional return on capital employed (ROCE) and residual income (RI), assuming that the annuity depreciation method is used on the newly acquired machinery. The annual repayment is R416 078.11.
Round your answers to two decimal places, where applicable.
Once calculated, recommend to management whether the contract should be accepted or not.
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