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Handle Fabrication is a division of a major corporation. Last the division had total salos of...

Handle Fabrication is a division of a major corporation. Last the division had total salos of $23,658,000, net operating income and average operating assets of $8,000,000. The company's minimum required rate of return is 8%. 1. The division manager wants to invest in additional delivery trucks in an to increase returns. The trucks would cost $800,000The manager estimates that the additional trucks will increase distribution and therefore increase operating income by $58,000. What would the division's on investment after making this investment? 2. Assume that a manager would only receive her bonus if her division achlovos an ROI of % or more If the manager's performance were judged based on ROI would she invest in the additional trucks? Yes or no Enter your answers in the same order as above.
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Answer #1

Calculation of return on investment.

In the given above case the manager expected that the additional trucks will increase operating income by $58000 and the trucks would cost $800000

We can arrive at the return on investment related to above investment In trucks.

= (58,000)÷8,00,000

= 7.25

The company policy to have minimum return on investment is 8% , but this investment is giving ROI of 7.25% only . So the company may not accept this decision but before taking any final decision take non-monetery factors regarding this investment that may affect division in long term

The division manager may not consider this investment plan as her bonus is connected with the concerned return on investment. But deciding bonus of manager solely on ROI is not appropriate in all cases.

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