Michelle Gutierrez, manager of the Components Division of FX Corporation, is considering a new investment for her division. The division has an investment base of $4,000,000 and operating income of $600,000. 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 corporate headquarters’ point of view.
Required
(a) What is the current return on investment (ROI) for the Components Division?
(b) What will the ROI be if Michelle undertakes the new investment?
(c) Suppose Michelle’s compensation consists of a salary plus a bonus proportional to her division’s ROI. Is Michelle’s compensation higher with or without the new investment?
(d) Suggest changes to FX Corporation’s management that will better align performance evaluation and compensation with corporate goals.