Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

The manager of the Fleet division of Potlatch Automotive is evaluated on her divisions return on investment and residual income. The company requires that all

The manager of the Fleet division of Potlatch Automotive is evaluated on her divisions return on investment and residual income. The company requires that all divisions generate a minimum return on invested assets of 8 percent. Consistent failure to achieve this minimum target is grounds for the dismissal of a division manager. The annual cash bonus paid to division managers is 1 percent of residual income in excess of $100,000. The Fleet divisions operating margin for the year was $8,981,000, during which time its average invested capital was $58,016,000.

a. Compute the Fleet divisions return on investment and residual income.

b. Will the manager of the Fleet division receive a bonus for her performance? If so, how much will it be?

c. In reporting her investment centers performance for the past 10 years, the manager of the Fleet division accounted for the depreciation of her divisions assets by using an accelerated depreciation method allowed for tax purposes. As a result, virtually all of the assets under her control are fully depreciated. How would the use of the accelerated method of depreciation affect ROI?

image text in transcribed

The use of accelerated depreciation will the division manager's current ROI and RI for two reasons: 1) her operating earnings margin will as annual depreciation expense decreases, and 2) the average asset base of her investment center will as its assets become fully depreciated. Thus, the use of accelerated depreciation over time will inflate her division's ROI and RI. Given that her bonus is based on RI, she will receive a larger bonus using accelerated depreciation than she would using the straight-line depreciation method

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Public Finance In Canada

Authors: Harvey S. Rosen, Ted Gayer, Jean-Francois Wen, Tracy Snoddon

5th Canadian Edition

1259030776, 978-1259030772

More Books

Students also viewed these Finance questions