Question

The manager of the 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 $9.663 million, during which time its average invested capital was $56.54 million. Required: a. Compute the Snack Division's return on investment and residual income. b. Will the manager of the Snack Division receive a bonus for her performance? If so, how much will it be? 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- line depreciation, is her use of an accelerated method ethical?

Answer 1

ANSWER

The Snack Division's operating margin for the year was $9.663 million
average invested capital was $56.54 million.

Return on investment %=operating margin/average capital invested
9.663 /56.54*100=17%

Residual income $ million=actual return on investment-minimum required rate of investment
17-8=9%
residual income=56.54 *9/100=5.09 million

(B)Manager’s bonus $
residual income=5.09 million
1 million=1000000
so the residual income is $5,090,000
cash bonus paid to division managers is 1 percent of residual income in excess of $100,000 i.e. 5,090,000-100000=4,990,000*1%=$49,900
Manager’s bonus $49,900

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