ROI, RI, investment decisions. The Media Group has three major divisions: a. Newspapersowns leading newspapers on four
Question:
ROI, RI, investment decisions. The Media Group has three major divisions:
a. Newspapers—owns leading newspapers on four continents
b. Television—owns major television networks on three continents
c. Film studios—owns one ofthe five largest film studios in the world Summary financial data for 2006 and 2007 are as follows (in millions):
Operating Income Revenues Total Assets 2006 2007 2006 2007 2006 2007 Newspapers $1,080 $1,320 $5,400 $5,520 $5,280 $5,880 Television 156 192 7,200 7,680 3,240 3,600 Film studios 264 240 1,920 1,980 3,000 3,120 The manager of each division has an annual bonus plan based on division return on investment (ROI). ROI is defined as operating income divided by total assets. Senior executives from divisions reporting increases in ROI from the prior year are automatically eligible for a bonus. Senior executives of divisions reporting a decline in the division ROI have to provide persuasive explanations for the decline to be eligible for a limited bonus.
Ken Kearney, manager of the Newspapers Division, is considering a proposal to invest
$240 million in high-speed printing presses with colour-print options. The estimated increment to 2008 operating income would be $36 million. The Media Group has a 12%
required rate ofreturn for investments in all three divisions.
Required 1. Use the DuPont method to explain differences among the three divisions in their 2007 division ROI. Use 2007 total assets as the investment base.
2. Why might Kearney be less than enthusiastic about the high-speed printing press invest¬
ment proposal?
3. Rupert Prince, chairman of the Media Group, receives a proposal to base senior executive compensation at each division on division residual income. Compute the residual income of each division in 2007.
4. Would adoption of a residual income measure reduce Kearney’s reluctance to adopt the high-speed printing press investment proposal?
Step by Step Answer:
Cost Accounting A Managerial Emphasis
ISBN: 9780131971905
4th Canadian Edition
Authors: Charles T. Horngren, George Foster, Srikant M. Datar, Howard D. Teall