The High Seas, Inc The Following Table Shows the Number of Managers Covered by into Three

question 7

Essay

The High Seas, Inc. manufactures water vessels and is organized into three large divisions: jet skis, fishing boats, and yachts. The following information presents operating revenues, operating incomes, and invested assets of the company over the last three years:
$\begin{array}{lrrr}\text { Operating Revenues }\\\text { (all amounts in } \$ 000 \mathrm{~s}) & 2020 & 2021 & 2022 \\\text { Jet Skis } & \$ 2,000 & \$ 3,000& \$ 4,000 \\\text { Fishing Boats } & 5,000 & 5,000& 4,000 \\\text { Yachts } & 8,000 & 7,000& 8,000\\\\\text { Operating Income }\\\text { Jet Skis } & \$ 500 & \$ 700 & \$ 1,000 \\\text { Fishing Boats } & 3,000 & 2,500 & 2,000 \\\text { Yachts } & 4,000 & 3,000 & 3,500\\\\\text {Invested Assets}\\\text {Jet Skis}&\$1,200&\$1,500&\$2,000\\\text {Fishing Boats}&\$2,000&\$1,500&\$1,5000\\\text {Yachts}&3,000&2,500&3,000\end{array}$

The following table shows the number of managers covered by the current compensation package of The High Seas, Inc.:
$$\begin{array} { | l | r | r | r | } \hline \text { Nurnber of Marnagers } & { 2020 } & 2021 & { 2022 } \\\hline \text { Jet Skis } & 50 & 60 & 70 \\\hline \text { Fishirng Boats } & 200 & 180 & 160 \\\hline \text { Yachts } & 250 & 200 & 250 \\\hline\end{array}$$
The current compensation package is an annual bonus award. The managers share in the bonus pool. The pool is calculated as 10% of the annual residual income of the company. The residual income is defined as operating income minus an interest charge of 14% of invested assets.
Required:
(1) Compute the bonus amount to be paid during each year. Also, compute the (average) individual executive bonus amounts.
(2) If the bonus was calculated by divisional residual income, what would be the bonus amounts?

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Definitions:

Economies of Scale

Cost benefits that companies gain from their operation size, where the cost for each unit of production typically falls as the scale expands.

Constant Returns to Scale

A situation in production where increasing all inputs by a certain factor results in output increasing by the same factor.

Average Total Cost

The total cost divided by the quantity of output produced; it includes all variable and fixed costs.

Minimum Efficient Scale

The smallest scale of production at which long-run average total costs are minimized.