The CFO is very impressed with your costing memo & she is wanting your help on a second issue. The CFO indicates that she is working on developing compensation structures for the various departments and wants your advice. She is considering compensating managers based on departmental performance and is wondering what metrics she should be using that best reflects the performance of the department. The company's philosophy is one of growth and departmental managers are empowered to make decisions on acquisitions. Midwest does not want to harm managers that take a chance on an acquisition. The CFO indicates that she has heard that the required rate of return & weighted cost of capital is 20%, but she's not quite sure what that means. She is considering four compensation structures and wants your input on which one to pick. She is considering a year end bonus based on either, return on investment, residual income, economic value added or operating income. To help your analysis the CFO has provided you with a departmental income statement for two divisions the bucket & grappler divisions.

(in thousands) Grappler Division Bucket Division

Total sales 15,000 21,000

Total costs 12,300 18,100

Operating income 2,700 2,900

Current assets 300 200

Long-term assets 11,000 15,000

Total Assets 11,300 15,200

Current liabilities 3,000 8,000

Required:

A memo to the CFO that discusses the four mentioned compensation possibilities for the department discussing the pros and cons of each method & why the performance for each department would look different under the four methods. Be sure to discuss her comment regarding wanting managers to always look for investment opportunities and how each method handles that as well as providing an explanation on what rate of return & WACC are. Provide a recommendation to the CFO with what should be picked

To support your analysis please show calculation of the of the four methods discussed above for each division