McCoy Brands Inc. (MBI) is a retailer of consumer products. The company made two acquisitions in previous years to diversify its product lines. In 2017, MBI acquired a consumer electronics firm producing computers. MBI now (2019) 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 $16,750 $84,550 2017 2018 125,480 9,500 5,700 90,450 92,450 90,950 2019 Office Supplies 48,750 45,660 52,800 2017 2,100 22,500 2018 2,340 21,900 2019 3,250 18,000 Computers 2,350 2017 100,500 21,450 2018 95,400 1,650 22,550 2019 114,350 2,575 24,100 2017 2018 2019 Consumer Electronics Office Supplies Computers 300 40 120 350 40 140 375 37 185