Products Inc. manufactures furniture and is organized into three large divisions: bedroom, living room, and dining room furniture. The following information presents operating revenues, operating incomes and invested assets of the company over the last three years. (all figures in 000s)
The following table shows the number of managers covered by the current compensation package of Products Inc.: The current compensation package is an annual bonus award. The managers share in the bonus pool. The pool is calculated as 12% of the annual residual income of the company. The residual income is defined as operating income minus an interest charge of 10% of invested assets.
Required:
(1) Use investment turnover, return on sales, and ROI to explain the differences in profitability of the three divisions for 2012, 2013 and 2014.
(2) Compute the bonus amount to be paid during each year. Also, compute the average individual executive bonus amounts (round to even dollar).
(3) If the bonus were calculated by divisional residual income what would be the bonus amounts for each division?
(4) Discuss the benefits and problems of basing the bonus on residual income of a company compared to using divisional residual income.

Question

Products Inc. manufactures furniture and is organized into three large divisions: bedroom, living room, and dining room furniture. The following information presents operating revenues, operating incomes and invested assets of the company over the last three years. (all figures in 000s)
  The following table shows the number of managers covered by the current compensation package of Products Inc.:  The current compensation package is an annual bonus award. The managers share in the bonus pool. The pool is calculated as 12% of the annual residual income of the company. The residual income is defined as operating income minus an interest charge of 10% of invested assets.
Required:
(1) Use investment turnover, return on sales, and ROI to explain the differences in profitability of the three divisions for 2012, 2013 and 2014.
(2) Compute the bonus amount to be paid during each year. Also, compute the average individual executive bonus amounts (round to even dollar).
(3) If the bonus were calculated by divisional residual income what would be the bonus amounts for each division?
(4) Discuss the benefits and problems of basing the bonus on residual income of a company compared to using divisional residual income.

Quizplus · Accepted Answer

The Answer of Products Inc. manufactures furniture and is organized into three large divisions: bedroom, living room, and dining room furniture. The following information presents operating revenues, operating incomes and invested assets of the company over the last three years. (all figures in 000s)
  The following table shows the number of managers covered by the current compensation package of Products Inc.:  The current compensation package is an annual bonus award. The managers share in the bonus pool. The pool is calculated as 12% of the annual residual income of the company. The residual income is defined as operating income minus an interest charge of 10% of invested assets.
Required:
(1) Use investment turnover, return on sales, and ROI to explain the differences in profitability of the three divisions for 2012, 2013 and 2014.
(2) Compute the bonus amount to be paid during each year. Also, compute the average individual executive bonus amounts (round to even dollar).
(3) If the bonus were calculated by divisional residual income what would be the bonus amounts for each division?
(4) Discuss the benefits and problems of basing the bonus on residual income of a company compared to using divisional residual income.