93
140) Financial data for Beaker Company for last year appear below:
The company paid dividends of $2,100 last year. The “Investment in Cedar Company” on the
statement of financial position represents an investment in the stock of another company.
Required:
a. Compute the company’s margin, turnover, and return on investment for last year.
b. The Board of Directors of Beaker Company has set a minimum required return of 20%. What
was the company’s residual income last year?
141) Xi, Inc. is just starting up. The management team has decided from the beginning that
decentralization was the preferred organizational style and has made this clear in all interviews
and discussions with potential employees. Mr. Yang, the CEO, is unsure about the best way to
evaluate his division managers. He has heard the terms return on investment, residual income,
economic value added, and flexible budgets but wants to know the pros and cons of each.
Required:
Briefly describe ROI, residual income, EVA and other approaches to performance evaluation.
Include in your discussion, where appropriate, how to calculate the measure and problem areas in
the development of some of the results.
142) Mrs. Young is the manager of the Children’s Toy division of Ferguson Corporation. Every
year she just misses the cut off established by the company for the awarding of bonuses. She is
concerned inasmuch as she believes she is running her division effectively and her income has
been increasing slowly but steadily over the years she has been with the company.
She knows that the company uses ROI as the performance measure to evaluate divisions and
begins to study the formula to see what she should do to improve the ROI for her division.
Required:
Briefly discuss several ways to improve ROI.
143) Decentralization is lauded as important to good management. But it is not without its
problems.
Required:
Identify the advantages and disadvantages of decentralization? How do ROI, Residual Income,
and EVA affect these issues?
144) Mallory, Inc. has the following data available for two of its divisions for last year:
Asian Division European Division
Sales $ 460,000 $ 900,000
Contribution Margin 184,000 470,000
Operating income 92,000 90,000
Average operating assets 368,000 750,000
Weighted average cost of capital 14 % 14 %
The tax rate for Mallory, Inc. is 18%.
Required:
(1) Compute the following for each division:
(a) Profit margin.
(b) Asset turnover.
(c) ROI.
(d) Residual income.
(e) EVA (assume there are no current liabilities).
(2) Briefly discuss which division appears most successful and why?
145) Roxie, Inc. has used a decentralized form of organizational structure for the past five years.
The controller, Ms. Hamburg, has noticed that some of the divisions are still using fixed assets
that are fully depreciated and that there has been little acquisition activity in these divisions.
Coupled with this are very high ROIs, especially when compared to the other divisions that seem
to have a regular program of disposition and replacement of fixed assets.
She takes her concerns and observations to the Financial Vice President who says he will review
her findings and look into the problem.
Required:
1) What are the potential negative effects of decentralization?
2) Specifically discuss the issues involved in suboptimization.
100
146) Suade Inc. manufactures furniture and is organized into three large divisions: bedroom,
living room, and dining room furniture. The following information presents operating revenues,
operating incomes and invested assets of the company over the last three years. (all amounts in
000s)
Operating Revenues 2020 2021 2022
Dining Room $ 8,000 $ 15,000 $ 16,000
Living Room 4,500 3,600 2,400
Bedroom 8,800 7,600 6,600
Operating Income
Dining Room $ 2,500 $ 3,100 $ 1,800
Living Room 450 900 600
Bedroom 1,200 1,500 1,600
Invested Assets
Dining Room $ 12,000 $ 12,500 $ 12,500
Living Room 2,500 2,400 2,200
Bedroom 4,500 4,700 4,900
The following table shows the number of managers covered by the current compensation
package of Suade Inc.:
Number of Managers 2020 2021 2022
Dinning Room 300 350 375
Living Room 40 40 37
Bedroom 120 140 175
The current compensation package is an annual bonus award. The managers share in the bonus
pool. The pool is calculated as 12% of the annual residual income of the company. The residual
income is defined as operating income minus an interest charge of 15% of invested assets.
Required:
(1) Use asset turnover, profit margin ratio, and ROI to explain the differences in profitability of
the three divisions.
(2) Compute the bonus amount to be paid during each year. Also, compute the (average)
individual executive bonus amounts.
(3) If the bonus was calculated by divisional residual income what would be the bonus amounts?
(4) Discuss the benefits and problems of basing the bonus on residual income of a company
compared to using divisional residual income.
103
147) The High Seas, Inc. manufactures water vessels and is organized into three large divisions:
jet skis, fishing boats, and yachts. The following information presents operating revenues,
operating incomes, and invested assets of the company over the last three years:
Operating Revenues
(all amounts in $000s) 2020 2021 2022
Jet Skis $ 2,000 $ 3,000 $ 4,000
Fishing Boats 5,000 5,000 4,000
Yachts 8,000 7,000 8,000
Operating Income
Jet Skis $ 500 $ 700 $ 1,000
Fishing Boats 3,000 2,500 2,000
Yachts 4,000 3,000 3,500
Invested Assets
Jet Skis $ 1,200 $ 1,500 $ 2,000
Fishing Boats $ 2,000 $ 1,500 $ 1,500
Yachts 3,000 2,500 3,000
The following table shows the number of managers covered by the current compensation
package of The High Seas, Inc.:
Number of Managers 2020 2021 2022
Jet Skis 50 60 70
Fishing Boats 200 180 160
Yachts 250 200 250
The current compensation package is an annual bonus award. The managers share in the bonus
pool. The pool is calculated as 10% of the annual residual income of the company. The residual
income is defined as operating income minus an interest charge of 14% of invested assets.
Required:
(1) Compute the bonus amount to be paid during each year. Also, compute the (average)
individual executive bonus amounts.
(2) If the bonus was calculated by divisional residual income, what would be the bonus amounts?
