section c

cim co (sep/dec 15 amended)

c) The return on investment is calculated by taking into account both the amount of profit and the investment in net assets to compare divisions of different sizes. It is a relative measure. But both the amount of profit and the value of net assets are subject to manipulation by divisional managers. Here division F’s return on investment is significantly higher than that of division of division N as a result of which the bonus based on this performance measure is much higher for division F. But part of this seems to be due to the higher value of net assets of division N due to which the profit as a percentage of this much higher asset base of division N results in a lower figure for return on investment. If profit in relation to sales revenue is considered it is 18.24% for division F wherease for division N it is 22.46%. So based on this division N seems to be performing better. Division N has invested 6.8 million in new equipment increasing its net asset base and resulting in lower return on investment. Although the investment reduces the figure for return on investment, it could be good for the long-term success of the company by increasing productivity. So return on investment performance measure seems to be focuing on the short-term at the expense of long-term benefits. It is surprising to note that the divisional manager of N has invested in new equipment whilst it will reduce the division’s return on investment and consequently the bonus. So it seems that the divisional manager of N has acted in the best interest of the company as a whole. In comparison, the divisional manager of F has postponed the investment in compouter system despite it is badly in need of upadting and delayed payments to suppliers despite having better cash balance than division N. So, by not investing and delaying payments to suppliers, the divisional manager of F has kept the return on investment figure artificially high. This could have serious consequences for the company. So, the return on investment performance measure is leading to this dsyfunctional behaviour by the divisional manager of F and decisions that are not goal congruent. If the divisional manager of F receives a higher bonus based on this performance measure then it could be demotivating for divisional manager of N. The divisional manager of N may decide to delay investments to increase his bonus like divisional manager of F does and this could have adverse effects on the performance of the company. The divisional manager of F may continue his dsyfuntional behaviour keeping return on investment figure artifically high to receive further bonuses.
Is the above answer enough for full marks