Michael Cianci,manager of Division C of the FX Corporation,is considering a new investment for his division.The division currently has an investment base of $4,000,000,and operating income of approximately $600,000 per year.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 the standpoint of the corporation as a whole.
Required:
1.What is the current return on investment (ROI)for Division C?
2.What will be the ROI of the division if the new investment is undertaken?
3.Suppose the manager's compensation consists of a salary plus a bonus proportional to divisional ROI.Would the manager's compensation higher with or without the new investment?
4.Suggest changes to corporate management that will better align performance evaluation and compensation with corporate goals.

Question

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Feedback: 11ea6e70_bd79_a592_8f54_9d8ee5afcf1a_TB1699_00 3.Because the overall ROI is higher without the new investment,Michael's compensation will be much higher if he does not undertake the new investment.Therefore,the compensation scheme does not provide incentives for a manager to undertake an investment that would benefit the corporation as a whole.
4.A variety of changes are possible.For example,the manager could receive a flat bonus upon achieving a target ROI or target residual income.Another alternative is to base the manager's compensation on a combination of financial and nonfinancial measures.Current-period actions that decrease the current period's financial performance may be creating future value.Such actions include investments in research and development,employee training,new distribution channels,and customer service.Conversely,companies that decrease their investments in these activities may show good current-period financial performance but they will have likely diminished future value.Therefore,a mixture of financial and non-financial measures can provide information about the current period's success in generating both current financial performance and growth options for the future.

Michael Cianci,manager of Division C of the FX Corporation,is Considering