Fundamentals of Financial Accounting 4th Edition by Fred Phillips,Robert Libby,Patricia Libby

Exercise 17

Critical Thinking: Analyzing Income Statement-Based Executive Bonuses
Callaway Golf believes in tying executives' compensation to the company's performance as measured by accounting numbers. Suppose, in a recent year, Callaway had agreed to pay its executive officers bonuses if (a) asset turnover meets or exceeds 0.8, and (b) net profit margin meets or exceeds 5.0 percent. Their bonuses will be even larger, if asset turnover meets (or exceeds) 1.6 and net profit margin meets (or exceeds) 7.0 percent. Total assets were $855 (million) and $838 (million) at December 31, 2008 and 2007, respectively. For the year ended December 31, 2008, total revenue was $1,117 (million) and net income was $66 (million).
Required:
1. Use the preceding information to determine whether Callaway executives met the two bonus targets in 2008.
2. Explain why the bonus arrangement might be based on both asset turnover and net profit margin ratios, rather than just one of these two ratios.