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QUESTION 4
You have been recently promoted to the divisional manager of Hadi Ltd (“the Company”), a company with 25 branches around the country. As a profit center, your division performance, is assessed by the head office on a monthly basis. The head office expects the controllable profit of your division to be at least 35% of sales. The following figures are related to your division for the month of June 2021:
Direct materials £50,000
Direct labour £40,000
Variable
Sales £200,000
Fixed overheads excluding depreciation £25,000
Head office cost allocation £16,000
Your division has no control at all over 80% of the depreciation, which relates to the non-current assets while 65% of the fixed overheads excluding depreciation are controllable at divisional level. The head office cost allocation relates to research and development expenditure.
Required:
Critically appraise the following statement: “Retained profits are a free source of long-term internal financing to a business.”
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