The manager of Wilson’s Toy Division 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 10 percent. Consistent failure to achieve this minimum target is grounds for the dismissal of a division manager. The annual bonus paid to division managers is 1.5 percent of residual income in excess of $200,000. The Toy Division’s operating margin for the year was $10 million, during which time its average invested capital was $75 million.

Instructions

a. Compute the Toy Division’s return on investment and residual income.

b. Will the manager of the Toy Division receive a bonus for her performance? If so, how much will it be?

c. What are some advantages and disadvantages of using ROI as a performance measurement criterion?