Domi Products, a multi-divisional manufacturing company, measures performance and awards bonuses to division managers based upon divisional operating income. Under the current bonus plan, common company-wide operating expenses are allocated evenly to all five of its divisions. For example, if rent were $50,000, each division would be charged $10,000. In planning next year's budget, corporate management has requested that the division managers recommend how common expenses should be distributed to the divisions. The division managers met and jointly developed an incentive plan that would more equitably distribute common expenses on the basis of resources used and that would measure each division manager's performance based on return on assets (ROI), with divisional bonuses based on a target ROI. They jointly presented their recommendation to corporate management.
Required:
1. Describe at least three problems that Domi Products could encounter when using return on investment (ROI) as the basis of performance measurement.
2a. Define the residual income (RI) approach to segment performance measurement.
2b. Determine if Domi Products should implement this approach instead of the ROI approach.
3. Discuss the behavioral implications of the division managers' involvement in the corporate budgeting process, and the decision to more equitably allocate common costs.

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The Answer of Domi Products, a multi-divisional manufacturing company, measures performance and awards bonuses to division managers based upon divisional operating income. Under the current bonus plan, common company-wide operating expenses are allocated evenly to all five of its divisions. For example, if rent were $50,000, each division would be charged $10,000. In planning next year's budget, corporate management has requested that the division managers recommend how common expenses should be distributed to the divisions. The division managers met and jointly developed an incentive plan that would more equitably distribute common expenses on the basis of resources used and that would measure each division manager's performance based on return on assets (ROI), with divisional bonuses based on a target ROI. They jointly presented their recommendation to corporate management.
Required:
1. Describe at least three problems that Domi Products could encounter when using return on investment (ROI) as the basis of performance measurement.
2a. Define the residual income (RI) approach to segment performance measurement.
2b. Determine if Domi Products should implement this approach instead of the ROI approach.
3. Discuss the behavioral implications of the division managers' involvement in the corporate budgeting process, and the decision to more equitably allocate common costs.

Domi Products, a Multi-Divisional Manufacturing Company, Measures Performance and Awards