ROI, RI, ROS, management incentives. (CMA, adapted) The Jump-Start Division (JSD)

of Mason Industries manufactures go-carts and other recreational vehicles. JSD is consider¬

ing building a new plant in 2007. The investment will cost $3.0 million. The expected rev¬

enues and costs for the new plant in 2007 are:

Revenues Variable costs Fixed costs Operating income

$2,880,000 960,000 1,344,000

$ 576,000 JSD’s ROI in 2006 is 24% and its return on sales (ROS) is 20%. ROI is defined as oper¬

ating income divided by total assets. The bonuses ofMaureen Grieco, the division manager ofJSD, and otherJSD managers are based on division ROI.

Required 1. If Mason Industries uses ROI to evaluate division managers, explain why JSD would be

..'"reluctant to build the new plant. Show all calculations.

2. Suppose Mason Industries uses RI as the basis for awarding bonuses to JSD’s managers.

Suppose further that the required rate of return on investment is 15%. Would JSD 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 JSD’s managers?