News Report Group has two major divisions: Print and Internet. Summary financial
ID: 2711034 • Letter: N
Question
News Report Group has two major divisions: Print and Internet. Summary financial data for 2014 are as follows:
Unit: $ million
Division
Operating Income
Revenue
Total Assets
Print Division
$4,500
$22,500
$25,000
Internet Division
$690
$23,000
$10,000
The two division managers’ annual bonuses are based on division ROI. If a division reports an increases in ROI from the previous year, its management is automatically eligible for a bonus. However, if a division reports a decline in ROI, the division manager has to present an explanation to the board of directors and is unlikely to get any bonus.
Carol Mays, manager of the Print Division, is considering a proposal to invest $2,580 million in a new printing system. It is estimated that the new system will increase 2015 division operating income by $360 million. News Report Group’s required rate of return on investment is 10%.
Required)
Using DuPont method of profitability analysis, explain differences in 2014 ROI between the two divisions.
Why might Mays be less than enthusiastic about accepting the investment proposal for the new printing system despite her belief in the benefits of new technology?
John Mendenhall, CEO of News Report Group, is considering a proposal to base division executive compensation based on division residual income (RI).
Compute the 2014 RI for each division.
Would adoption of an RI measure duce Mays’ reluctance to adopt the new printing system investment proposal?
Unit: $ million
Division
Operating Income
Revenue
Total Assets
Print Division
$4,500
$22,500
$25,000
Internet Division
$690
$23,000
$10,000
Explanation / Answer
1.ROI =operating income/Total assets
Print Division ROI =4500/25000=$0.18
Interenet Division ROI=690/10000=$0.069
Difference BEtween two divisions is$ 0.111
3. print interenet
4.NEW printing machine REsidual income
OPerating income $360
less capital charge 2580
Residual Income=-$ 2220million
Operating Income $4500 $690 Less capital charge $22500 $23000 Residual income -$18000 -$22310