ROI, RI division manager’s compensation, nonfinancial measures. Key information for the Peoria Division (PD) of Barrington Industries for 2007 follows:

Revenues $18,000,000 Operating income 2,160,000 Total assets 12,000,000 PD’s managers are evaluated and rewarded on the basis of ROI defined as operating income divided by total assets. Barrington Industries expects its divisions to increase ROI each year.

The year 2008 appears to be a difficult year for PD. PD had planned new investments to improve quality but, in view of poor economic conditions, has postponed the investment.

ROI for 2008 was certain to decrease had PD made the investment.

Management is now considering ways to meet its target ROI of 20% for next year. It anticipates revenues to be steady at $18,000,000 in 2008.

Instructions Form groups of two or more students to complete the following requirements.

1. Calculate PD’s return on sales (RO$) and ROI for 2007.

2.

a. By how much would PD have to cut costs in 2008 to achieve its target ROI of 20% in 2008, assuming no change in total assets between 2007 and 2008?

b. By how much would PD have to decrease total assets in 2008 to achieve its tar¬
get ROI of 20% in 2008, assuming no change in operating income between 2007 and 2008?
3. Calculate PD’s RI in 2007 assuming a required rate ofreturn on investment of 15%.
4. PD wants to increase RI by 50% in 2008. Assuming it could cut costs by $54,000 in 2008, by how much would PD have to decrease total assets in 2008?
5. Barrington Industries is concerned that the focus on cost cutting and asset sales will have an adverse long-run effect on PD’s customers. Yet Barrington wants PD to meet its financial goals. What other measurements, if any, do you recommend that Barrington use?
Explain briefly.