QUESTION 1.ROI &PERFORMANCE MEASURES & REWARD SYSTEMS

Auto World Ltd is a large and successful manufacturer of engines. The company consists of two

divisions: The Outboard Motor Division and the Automotive Engine Division. 'Auto World'

has recently acquired a new company which will become their third Division. The new Couch

Division is a small manufacturer of lawnmower motors. It has been owned and managed by a sole

proprietor for 40 years. The prior owner treated all employees as part of his family, the company

was highly noted for the lack of a 'them' and 'us' attitude between employees and management,

and there was free and open communication between all staff. The Couch is not a high performer

due to the decline in the lawnmower market, and profits have slipped. However, the Auto World

is known for its modern management systems and would like all managers at Couch to participate

in the performance-related pay system that is currently used in the other two divisions. The profitsharing

plan applies to senior divisional managers only. It is based on placing 10 percent of

Engine Designer's profits before interest and income tax into a pool, which is then shared by the

senior divisional managers in direct proportion to their base salaries. The senior managers in the

two original divisions (Outboard and Automotive) received bonuses of 11 percent and 12 percent

of their salaries for the last two years before the acquisition of Couch.

The profits for the 1st-financial year following the acquisition of Couch Division are as follows: