Section A

InvestBank evaluates its divisional managers based on Return on Investment (ROI). The target ROI is 15%. Division A currently has an ROI of 20%. The manager of Division A is considering a new project that requires an investment of $100,000 and will generate an annual controllable profit of $18,000.

Which of the following statements is true regarding the manager's likely decision and the concept of goal congruence?

Answer options:

The manager will accept the project because its ROI of 18% exceeds the company target of 15%, demonstrating goal congruence.

The manager will reject the project because its ROI of 18% is lower than the current divisional ROI of 20%, demonstrating a lack of goal congruence.

The manager will accept the project because Residual Income (RI) will increase, demonstrating goal congruence.

The manager will reject the project because its ROI of 18% is lower than the company target of 20%.

How to approach this question

Calculate the project's ROI ($18,000 / $100,000 = 18%). Compare it to the current divisional ROI (20%) and the target ROI (15%). Consider how the manager is evaluated.

Full Answer

B.The manager will reject the project because its ROI of 18% is lower than the current divisional ROI of 20%, demonstrating a lack of goal congruence.✓ Correct

Project ROI = $18,000 / $100,000 = 18%. The company wants projects > 15%. However, because the manager is evaluated on divisional ROI, adding an 18% project to a 20% division will lower the division's overall ROI. Therefore, the manager will likely reject it to protect their bonus. This is a classic example of dysfunctional behavior and a lack of goal congruence caused by using ROI.

Common mistakes

Assuming managers will always act in the best interest of the company (accepting the 18% project).

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