Question

A divisional manager receives a bonus of $25,000 based on the residual income from the division.During the current year, the division reported revenues of $2,500,000, variable expenses of $950,000 and fixed expenses of $750,000. The division had $3,000,000 in average operating assets. The minimum required rate of return for the division was 20%. What was the percentage of the manager’s bonus?

As described on the first line. The percentage of the managers bonus is based off of residual income. Please show work.

Answer 1

Residual income =  Net income - ( average operating assets * minimum rate of return)

Net income                     = Revenues - Expenses

Hence Net income       = $25,00,000 - $9,50,000  = $15,50,000

Residual income =$1550,000 - (3,000,000 @20%)

= 15,50,000 - $600,000=$950000

Manager Bonus =X % of Residual Income

$25000=X%   x    $950000

X%==$25000/$950000=0.026 or 2.63%