Groverton Marine evaluates the performance of its two division managers using an ROI formula. For the forthcoming period, divisional estimates of relevant measures are
|
Power Boats |
Sailboats |
Total Company |
|
|
Sales |
$12,000,000 |
$48,000,000 |
$60,000,000 |
|
Expenses |
10,800,000 |
42,000,000 |
52,800,000 |
|
Divisional assets |
10,000,000 |
30,000,000 |
40,000,000 |
The managers of both operating divisions have the autonomy to make decisions regarding new investments. The manager of the Power Boats division is contemplating an investment in an additional asset that would generate an ROI of 14 percent, and the manager of the Sailboats division is considering an investment in an additional asset that would generate an ROI of 18 percent.
a. Compute the projected ROI for each division disregarding the contemplated new investments.
b. Based on your answer in part (a), which of the managers is likely to actually invest in the additional assets under consideration?
c. Are the outcomes of the investment decisions in part (b) likely to be consistent with overall corporate goals? Explain.
d. If the company evaluated the division managers’ performances using a residual income measure with a target return of 17 percent, would the outcomes of the investment decisions be different from those described in part (b)? Explain.