The manager of Healthy Snack Division of Fairfax Industries is evaluated on her

Question

The manager of Healthy 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 $6.5 million, during which time its average invested capital was $50 million.

a.
Compute the Snack Division's return on investment and residual income. (Enter your Residual income answer in millions. Omit the "$" & "%" signs in your response.)


Return on investment %
Residual income $ million

b.
Will the manager of the Snack Division receive a bonus for her performance? If so, how much will it be? (Omit the "$" sign in your response.)

Manager’s bonus $

Explanation / Answer

The Snack Division's operating margin for the year was $6.5 million average invested capital was $50 million. Return on investment %=operating margin/average capital invested 6.5/50*100=13% Residual income $ million=actual return on investment-minimum required rate of investment 13-8=5% residual income=50*5/100=2.5 million (B)Manager’s bonus $ residual income=2.5 million 1 million=1000000 so the residual income is $2500000 cash bonus paid to division managers is 1 percent of residual income in excess of $100,000 i.e. 2500000-100000=2400000*1%=$24000 Manager’s bonus $24000

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