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:

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.

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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Check the Years Carefully please. Original Answer