Cost Management: A Strategic Emphasis 7th Edition by Edward Blocher,David Stout ,Paul Juras,Gary Cokins

Exercise 5

Performance Evaluation and Risk Aversion Heartwood Furniture Corporation has a line of sofas marketed under the name Night Time Sleepers. Heartwood management is considering several compensation packages for Amy Johnson, Night Time's general manager. Amy's duties include making all investing and operating decisions for Night Time.
Required
1. Amy is risk-neutral and prefers to receive the maximum reward for her hard work. Do you recommend compensation based on flat salary, an ROI-based bonus, or a combination of both Why
2. If Amy does not make investing decisions for Night Time, is ROI still a good performance measure If so, then explain why. If not, suggest an alternative.
3. Heartwood Furniture plans to evaluate Amy by comparing Night Time's ROI to the ROI of Stiles Furniture, which operates in a business environment similar to that of Night Time. Both companies have the same capabilities, but Stiles uses a significantly different manufacturing strategy than Night Time.
a. Would evaluating Amy with this benchmark be fair
b. Would using residual income instead of ROI offer any advantages for Heartwood