The manager of the snack division of Fairfax Industries is e

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 $9.964 million, during which time its average invested capital was $56.99 million.

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?

Solution

Answer

a ) operating margin = 9.964 millions

average capital investment = 56.99 millions

return on investment = 9.964 / 56.99 * 100

= 17 %

residual income = 17 - 8

= 9 %

residual income = 56.99 * 9 / 100

= 5.1 million

b )

residual income = 5100000

cash bonus paid to division manager is 1 percent of residual income is excess = 100000

= 5100000 - 100000

= 5000000 * 1 %

= 50000

manager bonus = 50000