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A well-established company, specialising in women's clothing has an annual sale in excess of $100 million. At present, the company has three production and distribution
A well-established company, specialising in women's clothing has an annual sale in excess of $100 million. At present, the company has three production and distribution divisions, each responsible for different specific product groups. The most recent sales and operating data for the three divisions are given below (In million dollars): Division A Operating Income $11.00 3.60 2.50 Sales $46.00 64.00 16.50 Average Assets $49.00 30.00 26.00 B The company is keen to ensure that each division operates as an autonomous investment center. Managers are given as much freedom as possible to manage their divisions. Division managers have an annual bonus plan based on division Return on Investment (ROI). Senior executives of divisions reporting increases in ROI from the prior year are automatically eligible for a bonus. Peter, manager of Division A, is considering a proposal to invest $2 million in asset to produce a new product that would generate a $0.3 million operating income. The company has a 12% minimum required rate of return in all three divisions. Required: a. Calculate the margin, turnover, ROI for the three division. Explain the differences among the three divisions in their ROIs. (12 marks) b. Why might Peter be reluctant to accept the new proposal? (3 marks) c. Martin, the CEO of the company, receives a proposal to base senior executives' compensation at each division on division Residual Income (RI). Calculate the RI of each division (before proposal). Which division's manager might object to the change? (7 marks) d. Would adoption of a RI measure reduce Peter's reluctance to adopt the new proposal? (3 marks) e. Martin has heard of the concept of balanced Scorecard. He is wondering why does the balanced scorecard include financial performance measures as well as measures of how well internal business processes are doing? Explain to him in detail
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