Responsibility-Center Designation and ROI Analysis

Task 1: Aloha Hotels and Resorts

1.The following partial organization chart is an extension of Exhibit 12–1 for Aloha Hotels and Resorts. 

Each of the hotel’s five main departments is managed by a director (e.g., director of hospitality). The Front Desk subunit, which is supervised by the front desk manager, handles the hotel’s reservations, room assignments, guest payments, and key control. The Bell Staff, managed by the bell captain, is responsible for greeting guests, front door service, assisting guests with their luggage, and delivering room-service orders. The Guest Services subunit, supervised by the manager of Guest Services, is responsible for assisting guests with local transportation arrangements, advising guests on tourist attractions, and such conveniences as valet and floral services.

Required:

As an outside consultant, write a memo to the hotel’s general manager suggesting a responsibility-center designation for each of the subunits shown in the organization chart above. Justify your choice.

2.Megatronics Corporation, a massive retailer of electronic products, is organized in four separate divi-sions. The four divisional managers are evaluated at year-end, and bonuses are awarded based on ROI. Last year, the company as a whole produced a 13 percent return on its investment.

During the past week, management of the company’s Northeast Division was approached about the possibility of buying a competitor that had decided to redirect its retail activities. (If the competitor is acquired, it will be acquired at its book value.) The data that follow relate to recent performance of the Northeast Division and the competitor:

Northeast Division  Competitor

Sales………………………………………………………. $8,400,000      $5,200,000

Variable Costs…………………………………………….. 70% of Sales    65% of sales

Fixed Costs ………………………………………………. $2,150,000    $1,670,000

Invested Capital ………………………………………….. $1,850,000    $625,000

Management has determined that in order to upgrade the competitor to Megatronics’ standards, an additional $375,000 of invested capital would be needed.

Required: As a group, complete the following requirements.

1. Compute the current ROI of the Northeast Division and the division’s ROI if the competitor is acquired. 

2. What is the likely reaction of divisional management toward the acquisition? Why? 

3. What is the likely reaction of Megatronics’ corporate management toward the acquisition? Why?  

4. Would the division be better off if it didn’t upgrade the competitor to Megatronics’ standards? Show computations to support your answer. 

5. Assume that Megatronics uses residual income to evaluate performance and desires a 12 percent minimum return on invested capital. Compute the current residual income of the Northeast Division and the division’s residual income if the competitor is acquired. Will divisional management be likely to change its attitude toward the acquisition? Why?