Mr T.G.R. Davies of the Grand SIam division has just submitted a budgeted ROI for the next year of 60%. Mr G. Wheel of the TripIe Crown division has submitted a 15% budgeted Rar. The company, Cambrian pIe, has a cost of capital of 30%, and accepts both the target ROIs. Actual performance during the year results in Grand SIam achieving 64.3% and TripIe Crown 15% ROIs.

Both divisional managers have substantial influence over their respective divisions' investment bases and the following information was used when they set the targets:

Required:

(a) To present a reasoned argument and analysis to help explain why each manager chose the ROI target he did.

(b) To determine whether targets expressed in RI terms would have altered the divisional managers' actions in any way. A comparison of budgeted and actual performance may prove useful.

(c) To explain the effect on each manager's target-setting if Cambrian imputed a cost of capital charge of 60% to Grand SIam and 15% to Triple Crown.

Transcribed Image Text:

Grand Slam Triple Crown Controllable profit Investment Controllable profit (m) (m) (m) Investment (m) 123345 3.75 4.5 5.5 5.8 6.0 11 6.2 3456789012 0.18 0.48 0.75 1.08 1.75 1.6 1.35 1.2 1.1 11 0.96 3456789012