The manager of the snack division of Fairfax Industries is evaluated on her divi
ID: 2397506 • Letter: T
Question
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?
Explanation / Answer
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
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