was the company’s residual income last year?
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140. Ricardo, 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. Pangea, 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.
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141. 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.
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142. 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?
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143. Marx, Inc. has the following data available for two of its divisions for last year:
The imputed interest for Marx, Inc. is 24%.
The tax rate for Marx, Inc. is 18%.
Required:
(1) Compute the following for each division:
(a) Sales margin.
(b) Capital turnover.
(c) ROI.
(d) Residual income.
(e) EVA (assume there are no current liabilities).
(2) Briefly discuss which division appears most successful and why?
144. Ladue, Inc. has used a decentralized form of organizational structure for the past five
years. The controller, Ms. Trevino, 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.
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145. Ginyard Company has the following financial statements for the year ended December 31,
2010.
Some additional information about 2011 includes:
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Required:
1. Complete a business analysis of Ginyard Company for 2010.
2. Complete a business valuation for Ginyard Company for 2010.
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146. Products 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 figures in
000s)
The following table shows the number of managers covered by the current compensation package
of Products Inc.:
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 investment turnover, return on sales, and ROI to explain the differences in profitability of
the three divisions.
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(2) Compute the bonus amount to be paid during each year. Also, compute the (average)
individual executive bonus amounts.
(3) If the bonus were 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.
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147. Boating 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:
(All figures in 000s.)
The following table shows the number of managers covered by the current compensation package
of Boating Inc.:
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?
