Great Brands Inc. (GBI) is a retailer of consumer products. The company made two acquisitions in previous years to diversify its product lines. In 2008, GBI acquired a consumer electronics firm producing computers. GBI now (2010) has three divisions: consumer electronics, cameras, and computers. The following information (in thousands) presents operating revenue, operating income, and invested assets of the company over the last three years.

The number of executives covered by GBI’s current compensation package follows:

The current compensation package is an annual bonus award. Senior executives share in the bonus pool, which is calculated as 10 percent of the company’s annual residual income. Residual income is defined as operating income minus an interest charge of 8 percent of invested assets.

Required

1. Use asset turnover, return on sales, and ROI to explain the differences in profitability of the three divisions.

2. Compute the bonus amount to be paid during each year; also compute individual executive bonus amounts.

3. If the bonuses were calculated by divisional residual income, what would the individual bonus amounts be?

4. Discuss the advantages and disadvantages of basing the bonus on GBI’s residual income compared to divisional residualincome.

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Revenue Income Assets Consumer Electronics $115,400 S14,560 S6,356 2008 8,900 45,750 110,450 2009 11,200 51,250 2010 123,500 Cameras 1,950 22,500 2008 45,600 1,350 22,400 2009 38,500 2,100 22,200 2010 49,800 Computers 2008 98,900 2,350 11,250 92,500 10,800 2009 1,650 2010 2,675 11,200 106,450