Suade IncManufactures Furniture and Is Organized into Three Large Divisions: Bedroom,living

question 4

Essay

Suade 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)

$$\begin{array} { | l | r | r | r | } \hline \text { Operating Revenues } & \mathbf { 2 0 1 6 } & \mathbf { 2 0 1 7 } & \mathbf { 2 0 1 8 } \\\hline \text { Dining Room } & \$ 8,000 & \$ 15,000 & \$ 16,000 \\\hline \text { Living Room } & 4,500 & 3,600 & 2,400 \\\hline \text { Bedroom } & 8,800 & 7,600 & 6,600 \\\hline \text { Operating Income } & & & \\\hline \text { Dining Room } & \$ 2,500 & \$ 3,100 & \$ 1,800 \\\hline \text { Living Room } & 450 & 900 & 600 \\\hline \text { Bedroom } & 1,200 & 1,500 & 1,600 \\\hline \text { Imrested Assets } & & & \\\hline \text { Dining Room } & \$ 12,000 & \$ 12,500 & \$ 12,500 \\\hline \text { Living Room } & 2,500 & 2,400 & 2,200 \\\hline \text { Bedroom } & 4,500 & 4,700 & 4,900 \\\hline\end{array}$$
The following table shows the number of managers covered by the current compensation package of Suade Inc.: $$\begin{array} { | l | r | r | r | } \hline \text { Number of Managers } & \mathbf { 2 0 1 6 } & \mathbf { 2 0 1 7 } & \mathbf { 2 0 1 8 } \\\hline \text { Dining Room } & 300 & 350 & 375 \\\hline \text { Living Room } & 40 & 40 & 37 \\\hline \text { Bedroom } & 120 & 140 & 175 \\\hline\end{array}$$
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 15% of invested assets.Required:
(1)Use investment turnover,return on sales,and ROI to explain the differences in profitability of the three divisions.
(2)Compute the bonus amount to be paid during each year.Also,compute the (average)individual executive bonus amounts.
(3)If the bonus were calculated by divisional residual income what would be the bonus amounts?
(4)Discuss the benefits and problems of basing the bonus on residual income of a company compared to using divisional residual income.

Understand the law of diminishing marginal returns and its implications for the marginal revenue product schedule.

Evaluate how changes in technology and labor supply affect the marginal revenue product of labor and the firm's hiring decisions.

Apply concepts of perfect competition in the context of the labor market to analyze firm behavior.

Explain how a firm's marginal cost curve relates to its decision-making in perfectly competitive product and labor markets.

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Definitions:

Employee Morale Risks

Potential threats to the overall confidence, enthusiasm, and satisfaction of employees within a workplace.

Security Risks

Potential threats that could compromise the safety and integrity of a company's data, systems, or networks.

Infrequent

Not occurring often; rare or uncommon.

Technology

The application of scientific knowledge for practical purposes, especially in industry through machinery, software, and devices.