Peregrine Enterprises is a large, diversified corporation with eight operating divisions. Each division is organized as a profit center. Each division manager's remuneration is augmented by a bonus based on the extent to which the divisional rate of return on capital employed exceeds 20% before taxes, with a ceiling set at 50% of the base salary. J. Black, president of Peregrine, is disturbed by the recent behavior of some of the company's division managers. The Marine Division operates salvage tugs very successfully, but it has come to Black's attention that the division manager recently turned down the opportunity to acquire a nuclear powered tug at a low price from an insolvent competitor. Similarly, the Airline Division manager has steadfastly refused to replace and update the division's fleet of aircraft despite increasing maintenance costs and pressure from federal safety officials. As the last straw, the Plastics Division manager recently ignored an opportunity to bid on a very attractive contract although the plant was operating well below capacity during December.
Black did not want to become involved in the internal decision making of the divisions, but in this instance, it appeared necessary. At a July planning meeting, Black emphasized to the division managers the need for Peregrine to increase its asset base and grow. Accordingly, Black instructed the corporate accountant to put together some of the relevant facts on these rejected investments and respective divisional operating performance. The data assembled follow:

Required:
(1) Make adjustments that improve the usefulness of the reported operating figures. Use your adjusted figures to recalculate the rate of return on capital employed. Also, cal¬culate residual income for all three divisions.
(2) Evaluate the operating performance of each of the three divisions and explain the division managers' decisions to reject the investment and contract opportunities.
(3) Discuss whether or not the Airline Division should be sold. Support your conclusion with both quantitative and qualitative analysis.
(4) Discuss whether or not any changes should be made in the management bonus scheme.
(5) Discuss whether or not any changes should be made in the way the divisional performance measures are computed, that is, the items included in the measures

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Peregrine Enterprises Division Operating Performance For Year Ending December 31, 20A (in thousands) Airline Plastics $115,000 $35,000 S 89,000 32.37078.880 $ 9,700 2630 10120 Marine Sales revenue.... Cost of goods sold.. Gross profi Less commercial expenses: Division selling and administration 395 190 3450 1185 570 S 4600 1.580 760 $1,050 9,360 $ 1.430 2,748 $ 6,559 45,000 1,150 Corporate headquarters allocation Total commercial expense. Divisional profit (before income tax) S 5,100 Division current assets.... Division fixed assets.. Less accumulated depreciation Corporate headquarters allocation 30,000 (12,000) 20,000 (18,000) (16,500) 252g 941 Divisional capital employed Divisional return on capital employed S 20.400 5000 36.000 26% Divisional managers' base salaries ..igsicue6 Bonus (10% of base salary for each 1% 60,000 $50,000 70,000 of return in excess of 20%, limited to 50% of base salary) 30,000 5,000 35,000 $ 90,000 55,000 $105,000 Total remuneration paid to division managers.. Financial Data on Recent Investments or Contracts Turned Down by Divisions (in thousands) Marine Airline Plastics Capital investments: Nuclear powered tug. $10,000 Fleet replacement $25,000 … incremental annual revenue.. Incremental operating cost.... Incremental gross profit Less incremental commercial expenses: $10,500 4,500 $10,000 7680 320 8,868 $2.820 $4,180 1,132 Division marketing and administration Corporate headquarters allocation $ 105 45 135 100 300 315 S 420 180 400 S 732 4000732 N/A Total Incremental divisional profit Return on capital investment 2,400 24% 16%