The manager of the processing division of XYZ Corporation is considering the purchase of new equipment,
The manager of the processing division of XYZ Corporation is considering the purchase of new equipment, which would modernize an aging plant. Currently, the division has an asset base of $8,000,000 and net operating income of $1,200,000. The new equipment is expected to cost $1,000,000; it supports the corporate strategy of competing on the basis of quality and customer response time. The new investment is also expected to increase operating income by $100,000 next year, which is an acceptable return on investment from the standpoint of corporate management.
- What is the current ROI for the processing division of XYZ Corporation? (Show calculations.)
- What will be the divisional ROI if the new investment is undertaken?
- Suppose that the compensation contract for the manager of the processing division consists of a base salary plus a bonus that is proportional to the ROI earned by the division. Is this manager’s total compensation higher with or without the new investment? (Show calculations.)
- What changes to the divisional manager’s compensation contract might corporate management make that would better align divisional manager’s compensation (and performance evaluation) with overall corporate goals?
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