The Manager of the Processing Division of XYZ Corporation Is

question 25

Essay

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 (CRT). The new investment is also expected to increase operating income by $100,000 next year, which is an acceptable return on investment (ROI) from the standpoint of corporate management.
Required:
1. What is the current ROI for the processing division of XYZ Corporation? (Show calculations.)
2. What will be the divisional ROI if the new investment is undertaken?
3. 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.)
4. 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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Definitions:

Rewards Drive

The motivation prompted by the anticipation or receipt of rewards, influencing behavior and decision-making.

Extrinsic Motivators

External incentives such as rewards or punishments that encourage a person to perform an activity, regardless of whether the activity is inherently enjoyable.

Money

A medium of exchange, unit of account, and store of value used to facilitate transactions and measure the value of goods and services.

Fame

The state of being widely known and recognized by the public, often due to achievements or notable qualities.