The manager of Healthy Snack Division of Mulchan Industries is evaluated on her
ID: 2380569 • Letter: T
Question
The manager of Healthy Snack Division of Mulchan Industries is evaluated on her division's return on investment and residual income. The company requires that all divisions generate a minimum return on invested assets of 8 percent. Consistent failure to achieve this minimum target is grounds for the dismissal of a division manager. The annual cash bonus paid to division managers is 1 percent of residual income in excess of $100,000. The Snack Division's operating margin for the year was $8,687,000, during which time its average invested capital was $61,875,000.
Compute the Snack Division's return on investment and residual income. (Round ROI answer to 2 decimal places. Omit the "$" & "%" signs in your response.)
Will the manager of the Snack Division receive a bonus for her performance? If so, how much will it be?(Round your answer to nearest dollar amount. Omit the "$" sign in your response.)
In reporting her investment center
The manager of Healthy Snack Division of Mulchan Industries is evaluated on her division's return on investment and residual income. The company requires that all divisions generate a minimum return on invested assets of 8 percent. Consistent failure to achieve this minimum target is grounds for the dismissal of a division manager. The annual cash bonus paid to division managers is 1 percent of residual income in excess of $100,000. The Snack Division's operating margin for the year was $8,687,000, during which time its average invested capital was $61,875,000.
Explanation / Answer
a.
Return on investment =8,687,000/61,875,000 = 14.04%
Residual income = Net Income - Equity Capital x Cost of Equity = 8,687,000-8%*61,875,000=$3,737,000
bManager's bonus=(3,737,000-100,000)*1% = $36,370
c.The use of (Click to select) accelerated depreciation straight line depreciation accelerated depreciation will increase the division manager's current ROI and RI for two reasons: 1) her operating earnings margin will (Click to select) decrease increase Increase as annual depreciation expense decreases, and 2) the average asset base of her investment center will (Click to select) decrease increase Decrease as its assets become fully depreciated. Thus, the use of accelerated depreciation over time will inflate her division's ROI and RI. Given that her bonus is based on RI, she will receive a larger bonus using accelerated depreciation than she would using the straight-line depreciation method.
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