Compensation Pools; Residual Income; Includes a Review of Chapter 19 McCoy Brands Inc. (MBI) is a retailer of consumer products. The company made two acquisitions in previous years to diversify its...

Compensation Pools; Residual Income; Includes a Review of Chapter 19 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 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.