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Comment on the benefits and limitations of the methods

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Question :ROI, RI, measurement of assets. (CMA, adapted) Carter Corporation recently announced a bonus plan to be awarded to the manager of the most profitable division. The three division managers are to choose whether ROI or RI will be used to measure profitability. In addition, they must decide whether investment will be measured using gross book value or net book value of assets. Carter defines income as operating income and investment as total assets. The following information is available for the year just ended:

Division

Gross Book Value of Assets

Accumulated Depreciation

Operating Income

Radnor

$1,200,000

$645,000

$142,050

Easttown

1,140,000

615,000

137,550

Marion

750,000

420,000

92,100

Carter uses a required rate of return of 10% on investment to calculate RI.

1. Each division manager has selected a method of bonus calculation that ranks his/her division number 1. identify the method for calculating profitability that each manager selected, supporting your answer with appropriate calculations.

2. Comment on the benefits and limitations of the methods chosen by each manager.

3. Identify and describe the two(2) broad types of dysfunctional behavior that the measures of profitability you calculated in Q1(a) may encourage and provide four (4) examples of dysfunctional behavior.

Reference no: EM132325715

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