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 $8,881,000, during which time its average invested capital was $60,836,000.
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| a. | ||
| Return on investment | 8881000/60836000 | 14.60% |
| Residual income: | 4014120 | |
| Actual Return (given) | 8881000 | |
| Minimum Return 8% | 60836000*8% | 4866880 |
| Residual Income | 8881000-4866880 | 4014120 |
| b. | ||
| Residual Income | 4014120 | |
| Less: 100000 | -100000 | |
| Income Remaining to calculate Bonus | 3914120 | |
| Bonus 1% of 3914120 | 39141 |
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