Green News Group has two major divisions: Print and Internet. Summary financial data (in millions) for 2014 and 2015 are as follows:
he two division managersâ annual bonuses are based on division ROI (defined as operating income divided by total assets). If a division reports an increase in ROI from the previous year, its management is automatically eligible for a bonus; however, the management of a division reporting a decline in ROI has to present an explanation to the Green News Group board and is unlikely to get any bonus. Carol Mays, manager of the Print Division, is considering a proposal to invest $800 million in a new computerized news reporting and printing system. It is estimated that the new systemâs state-of-the-art graphics and ability to quickly incorporate late-breaking news into papers will increase 2016 division operating income by $120 million. Green News Group uses a 15% required rate of return on investment for each division. Required: 1. Use the DuPont method of profitability analysis to explain differences in 2015 ROIs between the two divisions. Use 2015 total assets as the investment base. 2. Why might Mays be less than enthusiastic about accepting the investment proposal for the new system, despite her belief in the benefits of the new technology? 3. Murdoch Turner, CEO of Green News Group, is considering a proposal to base division executive compensation on division RI. a. Compute the 2015 RI of each division. b. Would adoption of an RI measure reduce Maysâs reluctance to adopt the new computerized system investment proposal? 4. Turner is concerned that the focus on annual ROI could have an adverse long-run effect on Green News Groupâs customers. What other measurements, if any, do you recommend that Turner use? Explain briefly.
TCD Operating Income A. F G H. 1 Revenue Total Assets 2014 2015 $18,480 $20,580 12,600 2014 2015 2015 2014 Print $3,780 $4,620 $18,900 $19,320 Internet 546 672 25,200 26,880 11,340 4 2.