Michael Cianci, Manager of Division C of the FX Corporation

question 60

Essay

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 (i.e., assets) 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 be higher with, or without, the new investment?
4. Suggest changes to corporate management that will better align performance evaluation and compensation with corporate goals.

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Definitions:

Social Impact

The effect of an activity on the social fabric of the community and well-being of individuals and families.

Energy Consumption

The amount of energy consumed by business processes or systems, often measured in kilowatt-hours (kWh) or megajoules.

Private Market

A component of the financial market in which financial instruments and assets are traded directly between parties without a public exchange.

Informational Cascade

A process in decision-making where individuals consecutively follow others' actions or choices ignoring their own private information.