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:

1. Prepare 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

2. To support your analysis please prepare a calculation of the of the four methods discussed above for each division.