Products Inc The Following Table Shows the Number of Managers Covered by Divisions

question 25

Essay

Products Inc. manufactures furniture and is organized into three large divisions: bedroom, living room, and dining room furniture. The following information presents operating revenues, operating incomes and invested assets of the company over the last three years. (all figures in 000s) $\begin{array}{lrrr} & \text { Operating Revenue } & \text { Operating Income } & \text { Invested Assets } \\\text { Dining Room } & & & \\2018 & \$ 8,000 & \$ 2,500 & \$ 12,000 \\2019 & 16,000 & 4,100 & 12,500 \\2020 & 16,000 & 1,800 & 12,500\\\text { Living Room } & & & \\2018 & 4,500 & 450 & 2,500 \\2019 & 4,600 & 800 & 2,400 \\2020 & 2,400 & 600 & 2,200\\\text { Bedroom } & & & \\2018 & 8,800 & 1,200 & 4,500 \\2019 & 8,600 & 1,800 & 4,700 \\2020 & 6,600 & 1,600 & 4,900\end{array}$
The following table shows the number of managers covered by the current compensation package of Products Inc.:
$\begin{array}{lcccc}\text { Number of } & & & & \\\text { Executives } & \text { Dining Room } & \text {Living Room } & \text { Bedroom } & \text { Total } \\2018 & 300 & 40 & 120 & 460 \\2019 & 350 & 40 & 140 & 530 \\2020 & 375 & 37 & 175 & 587\end{array}$ The current compensation package is an annual bonus award. The managers share in the bonus pool. The pool is calculated as 12% of the annual residual income of the company. The residual income is defined as operating income minus an interest charge of 10% of invested assets.
Required:
(1) Use investment turnover, return on sales, and ROI to explain the differences in profitability of the three divisions for 2018, 2019 and 2020.
(2) Compute the bonus amount to be paid during each year. Also, compute the average individual executive bonus amounts (round to even dollar).
(3) If the bonus were calculated by divisional residual income what would be the bonus amounts for each division?
(4) Discuss the benefits and problems of basing the bonus on firm-wide residual income of a company compared to using divisional residual income.

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Definitions:

Radial Pulse

Pulse detected in the radial artery.

Flexor Carpi Ulnaris

A muscle of the forearm that acts to flex and adduct (move towards the body) the wrist.

Flexor Carpi Radialis

A muscle of the forearm that acts to flex and abduct the hand.

Extensor Carpi Radialis Brevis

A muscle in the forearm that assists in extending and abducting the wrist.