ROI, RI, ROS, management incentives. (CMA, adapted) Soft Drinks Inc. is a company organized in several

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ROI, RI, ROS, management incentives. (CMA, adapted) Soft Drinks Inc. is a company ©

organized in several business units, each one dedicated to a particular type or flavour of soft drinks. The Ginger Ale Division produces and bottles ginger ale flavoured drinks, and its general manager is considering building a new plant in 2010 to expand capacity given the increasing and sustained demand experienced in the last 10 years. The investment will cost $3.0 million. The annual expected contribution margin is $1.5 million with ea revenues of $2.5 million; fixed costs for the new plant in 2010 will be $980,000. Ginger Ale Division’s ROI in 2009 is 20% and its return on sales (ROS) is 20%. ROT is defined as operating income divided by total assets. The bonuses of Adrian Shiling, the division manager of Ginger Ale, and other Soft Drinks managers are based on division ROI.

REQUIRED 1. If Soft Drinks uses ROI to evaluate division managers, explain why the Ginger Ale Division would be reluctant to build the new plant. Show all calculations.

2. Suppose Soft Drinks uses RI as the basis for awarding bonuses to Ginger Ale managers.

Suppose further that the required rate of return on investment is 15%. Would Ginger Ale Division be more willing to build the new plant? Explain.

3. Calculate the ROS for the new plant. What are the advantages and.disadvantages of using this measure to determine the bonuses paid to Ginger Ale managers?

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