News Mogul Group has two major divisions: Print and Internet. Summary financial data (in millions) for
2012 and 2013 are as follows:
The two division managers’ 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 News Mogul 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 system’s state-of-the-art graphics and ability to quickly incorporate late-breaking news into papers will increase 2014 division operating income by $120 million. News Mogul Group uses a 15% required rate of return on investment for each division.
1. Use the DuPont method of profitability analysis to explain differences in 2013 ROIs between the two divisions. Use 2013 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 News Mogul Group, is considering a proposal to base division executive compensation on division RI.
a. Compute the 2013 RI of each division.
b. Would adoption of an RI measure reduce Mays’s 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 News Mogul Group’s customers. What other measurements, if any, do you recom mend that Turner use? Explain briefly.