Faulkenheim GmbH is a manufacturer of tool and die machinery. Faulkenheim is a vertically integrated company that
Question:
Required
1. Calculate the return on investment in average operating assets employed (ROI) for 2007 for the Frankfurt Steel Division.
2. Calculate Frankfurt Steel Division's residual income on the basis of average operating assets employed.
3. Would the management of Frankfurt Steel Division have been more likely to accept the investment opportunity it had in 2007 if residual income were used as a performance measure instead of ROI? Explain.
4. Frank Weissmann, the chairman of Faulkenheim GmbH is considering one of four alternative ways to compensate division managers.
a. Pay each division manager only a flat salary and no bonus.
b. Make all of each division manager's compensation depend on division residual income.
c. Make all of each division manager's compensation depend on company-wide (Faulkenheim GmbH) residual income rather than divisional residual income.
d. Use benchmarking and compensate each division manager on the basis of his or her own division's residual income minus the residual profit of the other division. Assume the two divisions have comparable levels of investment and required rates of return. Assume that division managers do not like bearing risk. Evaluate each of the four alternatives Weissmann is considering, in the context of the structure and businesses of Faulkenheim GmbH. Indicate the positive and negative features of each proposal.
5. What compensation arrangement would you recommend? Explain your answer briefly.
Step by Step Answer:
Management and Cost Accounting
ISBN: 978-1405888202
4th edition
Authors: Alnoor Bhimani, Charles T. Horngren, Srikant M. Datar, George Foster