The manager of Healthy Snack Division of Fairfax Industries is evaluated on her division's 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 Snack Division's operating margin for the year was $9,014,000, during which time its average invested capital was $56,262,000.
| a. |
Compute the Snack Division's return on investment and residual income.
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| b. |
Will the manager of the Snack Division receive a bonus for her performance? If so, how much will it be?
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| c. |
In reporting her investment center%u2019s performance for the past 10 years, the manager of the Snack Division accounted for the depreciation of her division%u2019s 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. Given that the company%u2019s other division managers use straight-line depreciation, is her use of an accelerated method ethical? Defend your answer.
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The use of will increase 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.