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Leonard Smith, the managing director of the Brewing Division, is concerned that his market share, and hence his ROI, is likely to suffer next year, as his main competitor has recently purchased new brewing technology. While his own brewing equipment is only 10 years old, it is unable to produce the new variety of beers that customers are demanding, and maintenance and operating costs are increasing.
Smith is considering a proposal to invest $10 million in new equipment. This will probably increase next year’s operating profit for his division by $1 million. Smith has analysed the future cash flows of this proposal, and the new acquisition will easily satisfy the minimum required rate of return of 10 per cent for all new investments that is set for the Youngblood Group. Without this acquisition, Smith expects his divisional profit ROI to drop to 14 per cent next year.
Required:
1 Calculate the ROI for each division for last year and the current year, as well as the two components of ROI: profit margin and return on assets. Comment on the relative performance of the three divisions.
2 Calculate the bonus that each managing director would earn in the two years.
3 Explain why Leonard Smith is reluctant to invest in the new brewing equipment. Provide calculations to back up your answer.
4 Janice Cookson is considering expanding the divisional targets to include a range of non-financial measures. She is interested in developing a scorecard for each division. For each of the three divisions:
(a) Formulate objectives for each of the four perspectives: financial, customer, internal business process and learning and growth.
(b)Construct a strategy map to demonstrate the relationships between objectives for each perspective.
(c)Suggest lag and lead indicators for these perspectives
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