Problem 3: ROI, RI, DuPont Method, Investment Decisions, Balanced Scorecard News Report Group has two major divisions: Print and Internet. The summary of financial data (in millions) for 2013 and 2014 is as follows:

The two division managers annual bonuses are based on the division ROI (defined as operating income divided by total assets). If a division reports an increase in ROI from the previous year, its management is automatically eligible for a bonus; however, the management of a division reporting a decline in ROI has to present an explanation to the News Report Group board and is unlikely to get any bonus.

Carol Mays, manager of the Print division, is considering a proposal to invest $2,580 million in a new computerized news reporting and printing system. It is estimated that the new systems state-of-the-art graphics and ability to quickly incorporate late-breaking news into papers will increase 2015 division operating income by $360 million. News Report Group uses a 10% required rate of return on investment for each division.

Answer the following questions:

1. Use the DuPont method of profitability analysis to explain differences in 2014 ROIs between the two divisions. Use 2014 total assets as the investment base.

2. Why might Mays be less than enthusiastic about accepting the investment proposal for the new system despite her belief in the benefits of the new technology?

3. John Mendenhall, CEO of News Report Group, is considering a proposal to base division executive compensation on division RI.

a. Compute the 2014 RI of each division.

b. Would adoption of an RI measure reduce Mays reluctance to adopt the new computerized system investment proposal?

4. Mendenhall is concerned that the focus on annual ROI could have an adverse long-run effect on News Report Groups customers. What other measurements, if any, do you recommend that Mendenhall use? Explain.

Problem 4: Division Managers Compensation, Levers of Control (continuation of Problem 3)

John Mendenhall seeks your advice on revising the existing bonus plan for division managers of News Report Group. Assume division managers do not like bearing risk. Mendenhall is considering three ideas:

? Make each division managers compensation dependent on division RI.

? Make each division managers compensation dependent on company-wide RI.

? Use benchmarking and compensate division managers on the basis of their divisions RI minus the RI of the other division.

Answer the following questions:

1. Evaluate the three ideas Mendenhall has put forth using performance-evaluation concepts. Indicate the positive and negative features of each proposal.

2. Mendenhall is concerned that the pressure for short-run performance may cause managers to cut corners. What systems might Mendenhall introduce to avoid this problem? Explain.

3. Mendenhall is also concerned that the pressure for short-run performance might cause managers to ignore emerging threats and opportunities. What system might Mendenhall introduce to prevent this problem? Explain.

Submission Requirements:

Submit the completed assessment containing your calculations to the instructor for evaluation. In addition, submit the Excel sheet showing the calculations.

. Home Page layout-Formulas -Data Review-T Giew_H HomeInsert Page Layout Formulas Data ReviewView Insert Assets Operating Income 2014 $3,720 $4,500 690 Revenues 2013 2013 2013 2014 $18,200$25,000 11,150 10,000 2014 2 3 Print 4 Internet $18,700 $22,500 525 25,000 23,0001