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Question Three (17 Marks) Top Engine Inc. manufactures engines and is organized into three large divisions: Automotive engine, Outboard motor, and Lawnmower motor divisions. The
Question Three (17 Marks) Top Engine Inc. manufactures engines and is organized into three large divisions: Automotive engine, Outboard motor, and Lawnmower motor divisions. The following information presents operating incomes and invested assets of the company over the last three years. (all figures in 000s) Operating Income Invested Assets 4,100 1,800 12,500 12,500 Automotive 2018 2019 Outboard 2018 2019 Lawnmower 2018 2019 800 600 2,400 2,200 1,800 1,600 4,700 4,900 The following table shows the number of managers covered by the current compensation package of Top Engine Inc.: Outboard Number of managers 2018 2019 Automotive 350 375 40 37 Lawnmower 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 10% on invested assets. Required: 1. Calculate ROI for each division and explain the differences in profitability of the three divisions for 2018 and 2019. (5 marks) 2. The Bonus Pool is calculated as 12% of the annual residual income of the company. Determine the bonus pool available for 2018 and 2019. (5 marks) 3. If each division's bonus was calculated as 12% of divisional residual income what would be the bonus amounts for each division for 2018 and 2019? (3 marks) 4. Discuss the benefits and problems of basing the bonus on firm-wide residual income of a company compared to using divisional residual income. (4 marks)
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