Larry Simmons manages the Sporting Goods division of All- Sports Inc. All Sports
ID: 2565809 • Letter: L
Question
Larry Simmons manages the Sporting Goods division of All- Sports Inc. All Sports Inc. tracks the return on investment of each division. All Sports Inc. rewards its managers with a S3,000 bonus for each percentage point their return on investment exceeds a target rate of 8%. The Sporting Goods division reported the following departmental income last year: $8,490,000 Sales Cost of goods sold 4.250.000 Gross profit Operating expenses 3.040.000 Net income 4,240,000 $1,200.000 The average invested assets for the Sporting Goods division are $8,000,000 Due to Larry's outstanding performance, the top management of All-Sports Inc. has decided Larry should also manage a new division, Sportswear. The Sportswear division will require average invested assets of $2,000,000, and is projected to earn net income of $100,000 Required. 1. Compute Larry's bonus from managing the Sporting Goods 2. Compute Larry's bonus if he manages both the Sporting 3. 3. How do you think Larry will react when assigned the division. Goods and Sportswear divisions. Sportswear division, after computing his expected bonus from managing both the Sporting Goods and Sportswear divisions?Explanation / Answer
Net income of Sports Goods Division = $1,200,000
Average investment in Sports Goods Division = $8,000,000
Return on Assets = (1,200,000 / 8,000,000) x 100 = 15%
Target return =8%
Return achieved above target = 7% (15-8)
Bonus per precentage increase = $3,000
Total bonus for Larry = $21,000 (3000 x 7)
2. If larry manages both Sports Goods and sportswear divisions.
Net Income = $1,300,000 (1,200,000+100,000)
Assets invested =$ 3,200,000($8,000,000+$2,000,000)
Return on Assets Invested = ($1,300,000 / $10,000,000) x 100 = 13%
Bonus for Lary = $,3000 x (13 - 8) = 3,000 x 5 = $15,000
3.
He will not accept the management's offer as this will reduce his bonus earnings by $6,000 9from $21,000 to $15,000).He may ask the manegement to protect his bonus earnins .
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