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

Automotive

2018

4,100

12,500

2019

1,800

12,500

Outboard

2018

800

2,400

2019

600

2,200

Lawnmower

2018

1,800

4,700

2019

1,600

4,900

The following table shows the number of managers covered by the current compensation package of Top Engine Inc.:

Number of

managers

Automotive

Outboard

Lawnmower

2018

350

40

140

2019

375

37

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.

1. The Bonus Pool is calculated as12% of the annual residual income of the company.

Determine the bonus pool available for 2018 and 2019.

1. If each division's bonus was calculated as12% of divisional residual incomewhat would be the bonus amounts for each division for 2018 and 2019?

1. Discuss the benefits and problems of basing the bonus on firm-wide residual income of a company compared to using divisional residual income.