Kiki Electronics Ltd. specialises in the production of electronic entertainment products (such as HDTVs, digital TV set-top boxes, and DVD players). Over nine decades, the Kiki brand name has been synonymous with quality and innovation in the production of electronic entertainment products for both home and professional markets.

The following information is provided regarding Kiki’s Home Entertainment Division (HED) for the most
recent financial year:
Assets $500,000
Sales Revenues $725,000
Expenses $662,500
All uninvested funds are reinvested at the firm’s required rate of return (10%).

(a) Calculate the Return on Investment (ROI) for the HED. (1 mark)
(b) The HED has an opportunity to invest $300,000 in additional production machinery to introduce greater automation. It is estimated that improved production quality following this investment will result in an additional $40,000 in sales revenue in the next financial year, while the net change to expenses following this investment would be negligible. Calculate HEDs overall ROI if it took up this investment opportunity. (1 mark) [Hint: ROI = 12.81%]

(c) Another opportunity for the HED (independent of the option mentioned in part [b]) is to build a new customer service app where they access (for a fee) additional functionality for their HED products. Building the new app would require an investment of $100,000. Estimated revenue and expenses generated by this app over the next financial years are estimated to be $75,000 and $37,500 respectively. Calculate the HED’s new overall ROI if it took up this investment opportunity. (1 mark).

(d) Assume now that the HED has enough investment funds to consider either or both of the additional opportunities outlined in parts (b) and (c) above. If the HED General Manager’s bonus is based on maximising divisional ROI performance, which option/s would the manager choose to go with and why? Justify your response, including by providing any additional ROI calculations where needed. (2 marks)
(e) Is the bonus-maximising decision you believe the HED General Manager’s will make (I part [d]) be in Kiki’s best interests as a whole? If not, what decision would be in the company’s best interests overall? Justify your response, including by providing any additional ROI calculations where needed. (4 marks)
(f) Explain how ROI has contributed to the outcome you explained in part (e), and outline two ways in which the HED General Manager’s bonus scheme can be improved to overcome this issue.