Compute the Amount of the Bonus Based on Residual Income
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Question
A divisional manager receives a bonus based on 8.0% of residual income from the division. During the current year, the division reported revenues of $2,000,000. The division has a variable cost ratio of 40%, operating leverage of 3.0 and asset turnover of 1.0. The required rate of return for the division is 15%.
Required:
- Compute the amount of the bonus for the manager:
- If the manager wanted to double the amount of bonus earned how much must sales be increased assuming average operating assets remains the same and the cost structure of division remains the same.
Summary: This question belongs to management accounting and discusses about a company’s divisional manager residual income and to compute the amount of the bonus for the manager.
Total word count: 81
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