Reference no: EM132757766

Youngblood International has its head office in Brisbane, and operates throughout Australia, New Zealand and parts of Asia. There are two main divisions: Newspaper Division, which owns leading tabloid newspapers in several cities, and Brewing Divisions, which operates major breweries in Perth and Brisbane.

• Each division is headed by a managing director who has been given a high level of decision-making authority. Each managing director effectively runs his or her division as a stand-alone business within the general policy guidelines provided by the board of directors in the head office. Each managing director agrees to achieve a series of targets: return on investment (ROI), market share and sales growth. These targets are developed each year as part of the annual budget-setting process. Intense lobbying takes place between each managing director and the board of directors to determine the most suitable targets.

• Each managing director receives an annual cash bonus based on achieving the target divisional ROI. The company defines ROI as operating profit, before interest and taxes, divided by divisional assets (measured at original cost less accumulated depreciation). If the ROI target is not reached, there are no bonuses, and the managing director has to provide convincing reasons for the poor performance. As a consequence of the performance measurement and reward system, the managing directors are highly motivated to achieve-and exceed-their ROI targets.

• Janice Cookson has just been appointed as the new management accountant in the head office, charged with redesigning the performance measurement system. As her first task, she has obtained the financial data for the last year and the latest forecast for the current year, for each division, in thousands of dollars, as follows:Youngblood International has its head office in Brisbane, and operates throughout Australia, New Zealand and parts of Asia. There are two main divisions: Newspaper Division, which owns leading tabloid newspapers in several cities, and Brewing Divisions, which operates major breweries in Perth and Brisbane.

• Each division is headed by a managing director who has been given a high level of decision-making authority. Each managing director effectively runs his or her division as a stand-alone business within the general policy guidelines provided by the board of directors in the head office. Each managing director agrees to achieve a series of targets: return on investment (ROI), market share and sales growth. These targets are developed each year as part of the annual budget-setting process. Intense lobbying takes place between each managing director and the board of directors to determine the most suitable targets.

• Each managing director receives an annual cash bonus based on achieving the target divisional ROI. The company defines ROI as operating profit, before interest and taxes, divided by divisional assets (measured at original cost less accumulated depreciation). If the ROI target is not reached, there are no bonuses, and the managing director has to provide convincing reasons for the poor performance. As a consequence of the performance measurement and reward system, the managing directors are highly motivated to achieve-and exceed-their ROI targets.

Janice Cookson has just been appointed as the new management accountant in the head office, charged with redesigning the performance measurement system.

As her first task, she has obtained the financial data for the last year and the latest forecast for the current year, for each division, in thousands of dollars, as follows:

• Leonard Smith, the managing director of the Brewing Division, is concerned that 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% for all new investments that is set for the Youngblood Group. Without this acquisition, Smith expects his divisional profit ROI to be 14% next year.

Required:

Problem 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.

Problem 2 Explain why Leonard Smith is reluctant to invest in the new brewing equipment. Provide calculations to back up your answer.