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 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 $8,881,000, during which time its average invested capital was $60,836,000.

Explanation / Answer

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a.   Return on investment 8881000/60836000 14.60%   Residual income: 4014120 Actual Return (given) 8881000 Minimum Return 8% 60836000*8% 4866880 Residual Income 8881000-4866880 4014120 b. Residual Income 4014120 Less: 100000 -100000 Income Remaining to calculate Bonus 3914120 Bonus 1% of 3914120 39141

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