Products Inc. manufactures furniture and is organized into three large divisions: bedroom, living room, and dining...

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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) Operating Revenues 2006 2007 2008 Dining Room 8,000 15,000 16,000 Living room 4,500 3,600 2,400 Bedroom 8,800 7,600 6,600 Operating Income Dining Room 2,500 3,100 1,800 Living room 450 900 600 Bedroom 1,200 1,500 1,600 Invested Assets Dining Room 12,000 12,500 12,500 Living room 2,500 2,400 2,200 Bedroom 4,500 4,700 4,900 The following table shows the number of managers covered by the current compensation package of Products Inc.: Number of Managers 2006 2007 2008 Dining Room 300 350 375 Living room 40 40 37 Bedroom 120 140 175 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. (2) Compute the bonus amount to be paid during each year. Also, compute individual executive bonus amounts. (3) If the bonus was calculated by divisional residual income what would be the bonus amounts? (4) Discuss the benefits and problems of basing the bonus using residual income of a company compared to divisional residual income. 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) Operating Revenues 2006 2007 2008 Dining Room 8,000 15,000 16,000 Living room 4,500 3,600 2,400 Bedroom 8,800 7,600 6,600 Operating Income Dining Room 2,500 3,100 1,800 Living room 450 900 600 Bedroom 1,200 1,500 1,600 Invested Assets Dining Room 12,000 12,500 12,500 Living room 2,500 2,400 2,200 Bedroom 4,500 4,700 4,900 The following table shows the number of managers covered by the current compensation package of Products Inc.: Number of Managers 2006 2007 2008 Dining Room 300 350 375 Living room 40 40 37 Bedroom 120 140 175 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. (2) Compute the bonus amount to be paid during each year. Also, compute individual executive bonus amounts. (3) If the bonus was calculated by divisional residual income what would be the bonus amounts? (4) Discuss the benefits and problems of basing the bonus using residual income of a company compared to divisional residual income.