The manager of Healthy Snack Division of Fairfax Industries is evaluated on her

Question

The manager of Healthy Snack Division of Fairfax Industries is evaluated on her division's return on investment and residual income. The company requires that all divisions generate a minimum returm on invested assets of 8 percent. Consistent falure 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 yoar was $9,087,000, during which time its average invested capital was $63,419,000 a. Computo the Snack Division's return on investment and residual income. Round "Return on investment" to 2 decimal places.) Return on investment Residual income b. Will the manager of the Snack Division receive a bonus for her performance? If so, how much will it be? (Round your answer to the nearest whole dollar amount.) rs b c. In reporting her investment center's performance for the past 10 years, the manager of the Snack Division accounted for the depreciation of her division's assets by using an accelerated depreciation method allowed for tax purposes. As a result, virtually all of the assets under her control are fully depreciated. Given that the company's other division managers use straight-ine depreciation, is her use of an accelerated method ethical? The use of reasons: 1) her operating earnings margin will average asset base of her depreciation over time will inflate her division's return on investment and residual income. Given that her bonus is based on residual income, she will receive a a larger bonus using accelerated depreciation than she would using the straight-line depreciation method will increase the division managers current returm on investment and residual income for two as annual depreciation expense decreases, and 2) the as its assets become fully depreciated. Thus, the use of accelerated

Explanation / Answer

a) The Snacks Division's ROI and Residual Income are Computed as follows :-

ROI = Operating Margin / Average Invested Capital

ROI = $9087000 / $63419000

ROI = 0.1433 or 14.33%

Residual Income = Operating Margin - (Average Invested Capital * Minimum Required Return)

Residual Income = $9087000 - ($63419000*8%)

Residual Income = $9087000 - $5073520

Residual Income = $4013480

b) Calculation for Manager's Bonus :-

c) The Use of Accelerated depreciation will increase the division manager's current ROI and Residual Income for

two reasons :-

1) Her operating earning margin will Increase as annual depreciation expense decreases, and

2) The Average asset base of her Investment center will decrease as its assets become fully depreciated.

Particulars Amount($) Residual Income 4013480 Less : Portion excluded from bonus computation (100000) Amount for bonus computation 3913480 Bonus Perecentage 1% Manager's Bonus ($3913480*1%) 39135

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.