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Divisional performance appraisal and transfer pricing

ROI

 Divisional equivalent of ROCE

ROI = (controllable operating profit ÷ controllable capital employed) × 100

 Decision rule: If ROI > target cost of capital then accept divisional project or
appraise division as performing favourably.

 The advantages and disadvantages are as for ROCE. Two of the
disadvantages, i.e. dysfunctional behaviour and a tendency to hold onto old
assets are key drivers for one of the alternative measures (RI or EVA) being
used.

Illustrations and further practice

Now try TYU questions 1 and 2 from Chapter 9

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