Cost Management: A Strategic Emphasis 7th Edition by Edward Blocher,David Stout ,Paul Juras,Gary Cokins

Exercise 9

Compensation Pools; Residual Income; Includes a Review of Chapter 19 McCoy Brands Inc. (MBI) is a retailer of consumer products. The company made two acquisitions in previous years to diversify its product lines. In 2011, MBI acquired a consumer electronics firm producing computers. MBI now (2016) has three divisions: consumer electronics, office supplies, and computers. The following information (in thousands) presents operating revenue, operating income, and invested assets of the company over the last three years.

The number of executives covered by MBI's current compensation package follows:

The current compensation package is an annual bonus award. Senior executives share in the bonus pool, which is calculated as 10% of the company's annual residual income. Residual income is defined as operating income minus an interest charge of 6% of invested assets.
Required
1. Use asset turnover, return on sales, and return on investment (ROI) to explain the differences in profitability of the three divisions. Please use year-end rather than average asset values.
2. Compute the bonus amount to be paid during each year; also compute individual executive bonus amounts.
3. If the bonuses were calculated by divisional residual income, what would the individual bonus amounts be
4. Discuss the advantages and disadvantages of basing the bonus on MBI's residual income compared to divisional residual income.