Sports Co is a manufacturing company and uses Return on Investment (ROI) to assess the performance of its divisional managers. Its current target of ROI is 10% which is equivalent to its cost of capital. One of Sports Co divisions is division Alpha, which had achieved a ROI of 15% last year.

The purchase of new machine has been proposed by a member of staff working in division C. It is estimated that the new machine would generate a profit of 96,000 per annum for an investment of 800,000.

Required:

I. Using ROI as the current method of performance assessment, discuss whether the manager of Division Cis likely to accept or reject purchase of the new machineand why?

II. Will this decision be a benefit to or detrimental to the company?

III. Would the manager's decision remain the same if the performance was assessed on Residue Income (RI)and why.

XY Ltd is a new company specialising in manufacturing Laptops. In its first year, the company has incurred a high set up costs including research and development, product design and building of production facilities. Now it is ready to introduce its first branded laptop Beam into the market. The features of Beam are relatively better than those of the similar products in the market, but as said, the company and its products are new to the market.

Required:

I. Explain why penetration pricing strategy may be appropriate for pricing Beam laptop, and how the adoption of this strategy can affect the potential net profit from the product over its lifecycle stages

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