Hamiz Products, a manufacturing company, measures performance and awards bonuses to division managers based upon divisional operating profit. The company is composed of five manufacturing divisions working in different but related industries. Under the current incentive plan, common company-wide selling and administrative expenses are allocated evenly to all five of its divisions. For example, if rent were Rs.500,000 for the corporate head office, each division would be charged Rs.100,000 while making its segment income statement. In planning for next year's budget, corporate management has requested that the individual division managers recommend how common administrative and service departments expenses should be distributed among the divisions. The five division managers met and developed a remuneration plan that would more equitably distribute common expenses on the basis of resources used by that division from the head office and other support services. They also suggested that the company measure each division manager's performance based on return on assets (ROI), with divisional bonuses based on a target ROI. They presented their recommendation to corporate management jointly. REQUIRED:

a. Describe at least three problems that Hamiz Products could face if they use return on investment (ROI) as the basis of performance measurement. [6 Marks]

2. What possible behavioral implications could surface with the division managers' involvement in the corporate budgeting process and the decision to more equitably allocate common costs. [4 Marks]