World Information Group has two major divisions: print and Internet. Summary financial data (in millions) for 2011 and 2012 are:

The annual bonuses of the two division managers are based on 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 World Information Group board and is unlikely to get any bonus. Carol Mays, manager of the print division, is considering a proposal to invest $ 1,550 million in a new computerized news reporting and printing system. It is estimated that the new system’s state- of- the- art graphics and ability to quickly incorporate late- breaking news into papers will increase 2013 division operating income by $ 310 million. World Information Group uses a 16% required rate of return on investment for each division.

Required

1. Use the DuPont method of profitability analysis to explain differences in 2012 ROIs between the two divisions. Use 2012 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. Brett Gostkowski, CEO of World Information Group, is considering a proposal to base division executive compensation on division RI.

a. Compute the 2012 RI of each division.

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

4. Gostkowski is concerned that the focus on annual ROI could have an adverse long- run effect on World Information Group’s customers. What other measurements, if any, do you recommend that Gostkowski use? Explain briefly.

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Home Insert Page Layout Formulas Data Review View D H Operating Income Revenues Total Assets 1 2 2011 2012 2011 2012 2011 2012 3 Print Internet $3.780 $5.850 $18.700 25,100 $18.800 26,000 $18.450 11,250 $22,500 13,000 4 560 754