Suade Inc Manufactures Furniture and Is Organized into Three Large Divisions

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 amounts in 000s)
$\begin{array}{lrr} \text {Operating Revenues } &2020&2021&2022\\ \text { Dining Room } &\$8,000&\$15,000&\$16,000\\ \text { Living Room } &4,500&3,600&2,400\\ \text { Bedroom } &8,800&7,600&6,600\\\\ \text { Operating Income } &\\ \text {Dining Room } &\$2,500&\$3,100&\$1,800\\ \text { Living Room } &450&900&600\\ \text { Bedroom } &1,200&1,500&1,600\\\\ \text {Invested Assets } &\\ \text { Dining Room } &\$12,000&\$12,500&\$12,500\\ \text { Living Room} &2,500&2,400&2,200\\ \text {Bedroom } &4,500&4,700&4,900\\\end{array}$

The following table shows the number of managers covered by the current compensation package of Suade Inc.:
$$\begin{array} { | l | r | r | r | } \hline \text { Number of Managers } & 2020 & 2021 & { 2022 } \\\hline \text { Dirnirng Roorm } & 300 & 350 & 375 \\\hline \text { Living Room } & 40 & 40 & 37 \\\hline \text { Bedroom } & 120 & 140 & 175 \\\hline\end{array}$$
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 asset turnover, profit margin ratio, 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 was 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.