Analysis Exercise ROI:

Your assignment is to make a recommendation to the board of directors about how to pay out the bonus. Provide a clear explanation of the reasoning behind your recommendation. (Hint: Do not just make the decision based only on the numbers.)

ABC and XYZ are two divisions of a decentralized firm, Big Company. Each division has its own manager who has discretion as to all aspects of operations, including investments. Both divisions sell the same products, which are produced at a central location and then shipped to the divisions. ABC is located in British Columbia and is well established. The current manager has been there for 10 years and is respected by his colleagues and superiors. XYZ is located in Regina. This division has been struggling for a long time. It is sometimes profitable and sometimes not. The current manager took the position in mid-2019. He came to the firm highly recommended from a firm in California and took a substantial cut in pay to return to Saskatchewan, where he grew up.

Big Company has a policy of awarding $10,000 in bonuses to the managers based on the following rules:

• Each manager that achieves the target return on investment of 10% gets $2,000.
• After all the appropriate ROI bonuses are awarded, any funds remaining in the bonus pool will be awarded to the manager of the best division, to be determined based on ROI.

Information for ABC Division

Information for XYZ Division

Sales COGS GM Sales Salaries Rent on Sales Facility Depreciation Interest NI 2019 145,000 62,350 82,650 32,000 21,750 20,000 2020 153,700 67,628 86,072 34,000 23,055 20,000 2021 162,922 74,944 87,978 34,000 24,438 20,000 8,900 9,017 9,540 Cash Inventory PPE Accumulated Depreciation Total Assets 5,000 2,000 120,000 (40,000) 87,000 14,017 2,000 120,000 (60,000) 76,017 18,557 2,000 120,000 (80,000) 60,557 Accounts Payable Common Shares Retained Earnings Total Liabilities and Owner's Equity 6,000 60,000 21,000 87,000 1,000 60,000 15,017 76,017 1,000 60,000 (443) 60,557 Dividends Paid 15,000 25,000 ROI Return on Sales Asset Turnover 10.2% 6.1% 1.67 11.9% 5.9% 15.8% 5.9% 2.69 2.02 Sales COGS GM Sales Salaries Rent on Sales Facility Depreciation Interest NI 2019 58,000 26,680 31,320 12,000 8,700 12,000 650 (2,030) 2020 69,600 27,840 41,760 12,000 10,440 15,000 1,150 3,170 2021 84,216 32,844 51,372 13,000 12,632 18,000 750 6,990 Cash Inventory PPE Accumulated Depreciation Total Assets 5,000 5,000 35,000 (5,000) 40,000 12,170 6,000 45,000 (14,000) 49,170 11,160 7,000 50,000 (29,000) 39,160 Accounts Payable Loan Payable Common Shares Retained Earnings Total Liabilities and Owner's Equity 10,000 13,000 10,000 7,000 40,000 6,000 23,000 10,000 10,170 49,170 3,000 15,000 10,000 11,160 39,160 Dividends Paid 6,000 6.4% ROI Return on Sales Asset Turnover N/A N/A 4.6% 17.8% 8.3% 2.15 1.45 1.42 Sales COGS GM Sales Salaries Rent on Sales Facility Depreciation Interest NI 2019 145,000 62,350 82,650 32,000 21,750 20,000 2020 153,700 67,628 86,072 34,000 23,055 20,000 2021 162,922 74,944 87,978 34,000 24,438 20,000 8,900 9,017 9,540 Cash Inventory PPE Accumulated Depreciation Total Assets 5,000 2,000 120,000 (40,000) 87,000 14,017 2,000 120,000 (60,000) 76,017 18,557 2,000 120,000 (80,000) 60,557 Accounts Payable Common Shares Retained Earnings Total Liabilities and Owner's Equity 6,000 60,000 21,000 87,000 1,000 60,000 15,017 76,017 1,000 60,000 (443) 60,557 Dividends Paid 15,000 25,000 ROI Return on Sales Asset Turnover 10.2% 6.1% 1.67 11.9% 5.9% 15.8% 5.9% 2.69 2.02 Sales COGS GM Sales Salaries Rent on Sales Facility Depreciation Interest NI 2019 58,000 26,680 31,320 12,000 8,700 12,000 650 (2,030) 2020 69,600 27,840 41,760 12,000 10,440 15,000 1,150 3,170 2021 84,216 32,844 51,372 13,000 12,632 18,000 750 6,990 Cash Inventory PPE Accumulated Depreciation Total Assets 5,000 5,000 35,000 (5,000) 40,000 12,170 6,000 45,000 (14,000) 49,170 11,160 7,000 50,000 (29,000) 39,160 Accounts Payable Loan Payable Common Shares Retained Earnings Total Liabilities and Owner's Equity 10,000 13,000 10,000 7,000 40,000 6,000 23,000 10,000 10,170 49,170 3,000 15,000 10,000 11,160 39,160 Dividends Paid 6,000 6.4% ROI Return on Sales Asset Turnover N/A N/A 4.6% 17.8% 8.3% 2.15 1.45 1.42