QUESTION 7: performance evaluation investment centers BLR provides vehicle maintenance services through its chain of garages. Each garage operates as an investment center. Garage managers are targeted on Return on Investment (ROI) and receive a cash bonus if their garage generates an annual ROI of 15% or more. The cash bonus equals: [bonus unit x (ROI - 15%)] and is zero at minimum. BLR has a cost of capital of 8%. Table 1 presents a summary performance report for Garage A and Garage B: Table 1 Garage A Garage B Year 2 Year 1 Year 2 Year 1 $000 $000 $000 $000 Sales revenue 1 300 1 200 550 500 Material costs 190 180 79 75 Staff costs 355 350 150 150 Other operating costs 521 460 257.5 180 Profit 234 210 63.5 95 Assets employed 1 600 1 500 400 600 The assets employed in Table 1 are the net book value of the invested assets of each garage at the end of the year. REQUIRED la. Calculate ROI to assess the performance of the garage managers in year 2. 1b. Discuss, using all the information in Table 1 (the evolution of the costs, revenues and assets), the advantages and disadvantages of using ROI to determine manager bonuses. 2. Would it be useful to use Residual Income (RI) to assess the performance of the garage managers? 3. Give alternative accounting and non-accounting techniques (of any kind) that help prevent the dysfunctional side-effects of ROI/RI (cf. questions 1 & 2)