Genoa Equipment Company has three separate divisions: Tractors,Trailers,and Trucks.Information about the three divisions follows:
$\begin{array}{llll}&\text { Tractors }&\text { Trailers }&\text { Trucks }\
\text { Operating income } & \$ 10,125,000 & \$ 19,500,000 & \$ 3,600,000 \
\text { Operating assets } & \$ 15,000,000 & \$ 78,000,000 & \$ 13,500,000
\end{array}$
The company has recently implemented a new performance evaluation system.Based on this new system,a division manager would only receive a bonus if the ROI of the division was greater than 45% and residual income was in excess of $6,000,000.If management uses a cost of capital rate of 22%,which division manager(s)would be eligible for a bonus?
A)The Trucks Division.
B)The Trailers Division.
C)The Tractors Division.
D)All of the divisions.
E)None of the answer choices is correct.

Question

Quizplus · Accepted Answer

To determine which division manager(s) would be eligible for a bonus, we need to calculate both the Return on Investment (ROI) and the Residual Income (RI) for each division. The ROI is calculated as Operating Income / Operating Assets, and the Residual Income is calculated as Operating Income - (Operating Assets * Cost of Capital Rate).1. **Tractors Division:**   - ROI = $10,125,000 / $15,000,000 = 67.5%   - RI = $10,125,000 - ($15,000,000 * 22%) = $10,125,000 - $3,300,000 = $6,825,0002. **Trailers Division:**   - ROI = $19,500,000 / $78,000,000 = 25%   - RI = $19,500,000 - ($78,000,000 * 22%) = $19,500,000 - $17,160,000 = $2,340,0003. **Trucks Division:**   - ROI = $3,600,000 / $13,500,000 = 26.67%   - RI = $3,600,000 - ($13,500,000 * 22%) = $3,600,000 - $2,970,000 = $630,000Only the Tractors Division has both an ROI greater than 45% and a Residual Income in excess of $6,000,000, making the Tractors Division manager eligible for a bonus.

Genoa Equipment Company Has Three Separate Divisions: Tractors,Trailers,and Trucks The Company Has Recently Implemented a New Performance Evaluation System