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Performance Measurement & Transfer Pricing - Coggle Diagram

- - - - Advantages
        
        Widely understood
        
        Present clear divisional performance
        
        Concentrate on projects which make best use of resources
        
        Emphasise profit
        
        Favour to divisional manager with no control over investment
      - Disadvantages
        
        Does not consider timing of revenue generation
        
        Does not consider type of cost
        
        Does not consider the quality of assests
        
        Affected by many factors
        
        Only shows one percentage figure
        
        Short-term
      - Example
        
        A company that is primarily focused on short-term profitability, such as a startup or a company in a rapidly changing industry,
      - ROI = (Net Profit / Cost of Investment) x 100%
    - - Profit before Tax - Interest Charge
      - Advantages
        
        Takes into account the cost of capital and the risk of investments
        
        Only affected by additional profit (compared to ROI)
        
        Emphasise profit
        
        Allow freedom for divisional manager in investment
      - Disadvantages
        
        Requires a clear understanding of the cost of capital and how to allocate it
        
        May not be as useful for short-term decision-making
        
        Can be more complex to calculate than ROI
      - Example
        
        A company that is focused on creating long-term value and maximizing returns on investments, such as a mature company in a stable industry
      - Residual Income = Net Income - (Cost of Capital x Total Assets)
    - - Original cost
      - Net book value
        
        NBV = Purchased - Depreciation
      - Current cost