McCoy Brands Inc. (MBI) is a retailer of consumer products. The company made two acquisitions in previous years to diversify its product lines. In 2020, MBI acquired a consumer electronics firm producing computers. MBI now (2022) has three divisions: Consumer Electronics, Office Supplies, and Computers. The following information (in thousands) presents operating revenue, operating income, and invested assets of the company over the last 3 years:

The number of executives covered by MBI’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% of the company’s annual residual income. Residual income is defined as operating income minus an interest charge of 6% of invested assets.

Required

1. Compute asset turnover, return on sales, and return on investment (ROI) for each division and for each year. Use year-end rather than average asset values. Round to 2 decimal places.

2. Use the ratios computed in requirement 1 to explain the differences in profitability of the three divisions.

3. Compute the total bonus amount to be paid during each year; also compute individual executive bonus amounts. Round to the nearest whole dollar.

4. If the bonuses were calculated by divisional residual income, what would the individual bonus amounts be? Round to the nearest whole dollar.

5. Discuss the advantages and disadvantages of basing the bonus on MBI’s residual income compared to divisional residual income.

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Revenue Income Assets Consumer Electronics $155,780 125,480 $84,550 90,450 92,450 2020 $16,750 2021 9,500 5,700 2022 90,950 Office Supplies 22,500 21,900 18,000 2020 2,100 48,750 45,660 52,800 2021 2,340 3,250 2022 Computers 2,350 1,650 2020 100,500 95,400 21,450 22,550 24,100 2021 2022 114,350 2,575