QUESTION 1.ROI &PERFORMANCE MEASURES & REWARD SYSTEMS 10 MARKS Auto World Ltd is a large and successful manufacturer of engines. The company consists of two divisions: The Outboard Motor Division and the Automotive Engine Division. 'Auto World' has recently acquired a new company which will become their third Division. The new Couch Division is a small manufacturer of lawnmower motors. It has been owned and managed by a sole proprietor for 40 years. The prior owner treated all employees as part of his family, the company was highly noted for the lack of a 'them' and 'us' attitude between employees and management, and there was free and open communication between all staff. The Couch is not a high performer due to the decline in the lawnmower market, and profits have slipped. However, the Auto World is known for its modern management systems and would like all managers at Couch to participate in the performance-related pay system that is currently used in the other two divisions. The profitsharing plan applies to senior divisional managers only. It is based on placing 10 percent of Engine Designer's profits before interest and income tax into a pool, which is then shared by the senior divisional managers in direct proportion to their base salaries. The senior managers in the two original divisions (Outboard and Automotive) received bonuses of 11 percent and 12 percent of their salaries for the last two years before the acquisition of Couch. The profits for the 1 st -financial year following the acquisition of Couch Division are as follows: Outboard Automotive Couch Sales revenue $31 600 000 $42 000 000 $9 500 000 Cost of Goods sold 10 000 000 24 000 000 4 500 000 Gross margin $21 600 000 $18 000 000 $5 000 000 Administrative costs 11 800 000 7 400 000 3 600 000 Marketing and selling costs 7 400 000 6 200 000 1 200 000 Total costs $19 200 000 $13 600 000 $4 800 000 Profit before interest and tax $2 400 000 $4 400 000 $200 000