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20-44 Compensation Pools; Residual Income; Review of Chapter 19 McCoy Brands Inc. (MBI) is a retailer of consumer products. The company made two acquisitions in

20-44

Compensation Pools; Residual Income; Review of Chapter 19 McCoy Brands Inc. (MBI) is a retailer of consumer products. The company made two acquisitions in previous years to diversify its product lines. In 2020, MBI acquired a consumer electronics firm producing computers. MBI now (2022) has three divisions: Consumer Electronics, Office Supplies, and Computers. The following information (in thousands) presents operating revenue, operating income, and invested assets of the company over the last 3 years:

Revenue

Income

Assets

Consumer Electronics

2020

$155,780

$16,750

$84,550

2021

125,480

9,500

90,450

2022

90,950

5,700

92,450

Office Supplies

2020

48,750

2,100

22,500

2021

45,660

2,340

21,900

2022

52,800

3,250

18,000

Computers

2020

100,500

2,350

21,450

2021

95,400

1,650

22,550

2022

114,350

2,575

24,100

  • The number of executives covered by MBIs current compensation package follows:

2020

2021

2022

Consumer Electronics

300

350

375

Office Supplies

40

40

37

Computers

120

140

185

  • The current compensation package is an annual bonus award. Senior executives share in the bonus pool, which is calculated as 10% of the companys annual residual income. Residual income is defined as operating income minus an interest charge of 6% of invested assets.Page 0900

Required

  1. Compute asset turnover, return on sales, and return on investment (ROI) for each division and for each year. Use year-end rather than average asset values. Round to 2 decimal places.
  2. Use the ratios computed in requirement 1 to explain the differences in profitability of the three divisions.
  3. Compute the total bonus amount to be paid during each year; also compute individual executive bonus amounts. Round to the nearest whole dollar.
  4. If the bonuses were calculated by divisional residual income, what would the individual bonus amounts be? Round to the nearest whole dollar.
  5. Discuss the advantages and disadvantages of basing the bonus on MBIs residual income compared to divisional residual income.

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