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11-58 Return on investment   Michelle Gutierrez, manager of the Components Division of FX Corporation, is consideringa...

11-58 Return on investment   Michelle Gutierrez, manager of the Components Division of FX Corporation, is consideringa new investment for her division. The division has an investment base of $4,000,000 and operating income of $600,000. The new investment of $500,000 supports corporate strategy and is expected to increase operating income by $50,000 next year, an acceptable level of return from corporate headquarters point of view.

Required

(a) What is the current return on investment (ROI) for the Components Division?

(b) What will the ROI be if Michelle undertakes the new investment?

(c) Suppose Michelle's compensation consists of a salary plus a bonus proportional to her division's ROI. Is Michelle's compensation higher with or without the new investment?

(d) Suggest changes to FX Corporation's management that will better align performance evaluation and compensation with corporate goals.

Solutions

Expert Solution

(a) What is the current return on investment (ROI) for the Components division?

Solution: The ROI for the Components division is 15%.

Working: Operating Income/Investment Base = $600,000/4,000,000 =15%

　

(b) What will the ROI be if Michelle undertakes the new investment?

Solution: If Michelle undertakes the new investment, the ROI would be 11.96%.

Working: New Operating Income/New Investment Base = $$550,000 / 4,600,000 = 11.96%

　

(c) Suppose Michelle’s compensation consists of a salary plus a bonus proportional to her division’s ROI. Is Michelle’s compensation higher with or without the new investment? Solution: Because the new ROI of 11.96% is lower than original ROI of 15%, Michelle’s compensation would be lower with the new investment. Thus, Michelle should not undertake the new investment

　

(d) Suggest changes to corporate management that will better align performance evaluation and compensation with corporate goals

Solution: To better align performance evaluation and compensation with corporate goals the individual goals need to be aligned with business strategy to ensure that the time and resources are not wasted. It is important that the management should communicate and expectations in a proper way, effectively resourcefully ascertain the target areas for the improvement.

ekkarill92 answered 2 years ago
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