For each division of Q Ltd., COMPUTE, ROI for the year ending 31 March 2025. JUSTIFY the figures used in your calculation also COMPUTE bonus of each…

ROI ROI expresses divisional profit as a percentage of the assets employed in the division. Assets employed can be defined as total divisional assets, assets controllable by the divisional manager, or net assets. ROI is a common measure and thus ideal for comparison across corporate divisions for companies of similar size and in similar sectors. Division 'F' controllable profit = 5,200K Net Assets = 19,500k +5,000K -6,200K = 18,300K ROI = 28.42% Division 'G' Controllable profit = 4,000K Net Assets = 30,000K +6,500K -2,800K = 33,700K ROI = 11.87% Responsibility accounting advocates that managers performance shall be judged based upon how well he or she manages the items under his or her control, hence in computation Of ROI of division, controllable profit has been taken into consideration, because head Office costs are not controllable by divisional managers. Figures of non-current and current assets apart from the current liabilities have been taken into consideration as they are such items over which divisional managers have complete control. Bonus Bonus to be paid for each whole percentage point is 21,600 (₹ 7,20,000 x 3%). But there is ceiling limit as well, i.e. 20% of salary hence the maximum Bonus be - 1,44,000 (₹ 7,20,000 x 20%). Division 'F' Divisional ROI is 28.42%, which results in 16 whole percentage points above the minimum required ROI of 12%. Hence the bonus according to each whole percent of excess ROI will be - 3,45,600 (16 x 21,600). But there is upper cap of 1,44,000. Therefore, BAO be paid the bonus of 1,44,000. Division 'G' Divisional ROI is 11.87%, since same is less than the minimum required ROI of 12%, hence PAO will not be rewarded with a bonus. PAO will not receive any bonus since he has not earned any point above minimum percentage. This is due to the larger investment base on which the ROI figure has been computed. Total investment of Division 'G' is almost 1.84 times to that of Division 'F'. The major reason behind this is that Division 'G' invested 13.6 million (₹ 13,600K) in new equipment during the year. Ignoring this investment of division D is just 0.91 times to that of division 'F' and net Investments would have been only - 20,100K and the ROI for Division 'G' would have been 19.9% resulting in payment of a bonus 1,44,000 (7 × ₹ 21, 600 i.e.1,51,200 but subject to upper cap of 1,44,000) rather than the nothing. So, PAO is being penalized for making investment decisions which are in the best interests of his division and company, because new investment enhance productivity which will support customer loyalty, dedication to customer services and quality, the CSFs for Q Ltd. It is very surprising that he decided to invest where he knew that he would receive a lesser bonus subsequently. On the other hand, BAO has benefited from the fact that he has not invested in anything even though it was needed for computer system updation. This is an example of sub-optimal decision making. Further, Division ‘F's trade payables are more than double those of Division ‘G'. In part, one would expect this due to higher sales (almost 71% more than Division ‘G') and low cash levels at Division ‘F’. Higher trade payable leads to a reduction in net assets figures. The fact that Q Ltd. is rewarding BAO with a bonus, even though relationships with suppliers may be badly affected, is again a case of sub-optimal decision making. If the profit margin (excluding head office cost) as percentage of sales is calculated, it comes to 17.33% (₹ 5,200 /30,000) for division ‘F' and 22.86% (₹ 4,000 /17,500) for division 'G'. Therefore, it can be seen that division 'G' is performing better if capital employed is ignored. ROI is simply distorting the division 'G's performance. PAO might feel extremely disappointed by getting nothing and in the future, he may opt to postpone the investment to increase the bonus. Non- investing in new technology and equipment will mean that the Q Ltd. will not be kept updated with industry changes and its overall future competitiveness will be affected. Briefly, the use of ROI results in sub-optimal decision making and a lack of goal congruence i.e. what is good for the managers is not necessarily good for the company too and vice versa. Hence ROI is not a justifiable basis to for computing the bonuses of divisional managers and also cause problem for Q Ltd.