Grayson & Sons, a local car dealership, has three separate divisions: car repair

Question

Grayson & Sons, a local car dealership, has three separate divisions: car repair, new car sales, and used car sales. The company has decided to implement a new system for evaluating the performance of its three division managers and the bonuses they receive. The following information is available with respect to each division for the current year: Car Repair New Car Sales Used Car Sales Operating income $2,000,000 $ 8,000,000 $3,000,000 Operating assets 3,000,000 18,000,000 8,000,000 In order to receive a bonus, a division manager must have an ROI greater than 50% and residual income in excess of $1,400,000. If management uses a minimum required rate of return of 18%, which division manager(s) would be eligible to receive a bonus? Car repair only New car only Used car only Car repair, new car, and used car

Explanation / Answer

as per the above calculation only repair's division manager is eligible for bonus as ROI is greater than 50% and residual income is greater than $1,400,000

car repair new car sales Used car sales operating income    2,000,000         8,000,000          3,000,000 operating assets    3,000,000      18,000,000          8,000,000 ROI 67% 44% 38% minimum requried return       540,000         3,240,000          1,440,000 Residual income    1,460,000         4,760,000          1,560,000

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