Question
JOY Ltd has been operating in a divisionalised structure with Division A and Division B, which is managed by a divisional manager with divisional autonomy
JOY Ltd has been operating in a divisionalised structure with Division A and Division B, which is managed by a divisional manager with divisional autonomy given to make all investment decisions for their own division. Each division has its own cost and revenue streams. The cost of capital is estimated at 10% for both divisions. Traditionally, all investment decisions have been made by calculating the return on investment (ROI) and at present, the ROI of each division is 15%. ROI is calculated using the formula of net profit over the average capital investment value
A new divisional manager, Ms. Katie was recently appointed in Division B and has voiced-out that using residual income (RI) measure to make investment decisions would result in 'better goal congruence' throughout the whole company.
Each division is considering the following separate investment proposals:
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