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Compute the residue income

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Reference no: EM132965760

Question - Sam's Corporation has a division operating in Macau, and Sam sets the target rate of return of 25% for 2020. In the year of 2020, Macau Division generated $30,000,000 of revenue on average assets of $18,000,000. The division's variable costs were 60% of sales revenue and the fixed expenses were $4,500,000. In the year of 2021, Sam expects an increase in sales of I 5% and an increase of $1,000,000 in rent expense due to the renewal of shop's rental contract for the next five years. The average assets would have 12% increases on every 15% increase in sales. Sam is thinking to motivate the management of Macau Division, Sam is considering two bonus plans: Plan A is based on ROI (return on investment) with the formula of: (ROI- Target Rate) X $1,000,000; Plan Bis based on RI (residue income) with formula of RIX 0.05.

Instructions -

a. Compute the return on investment of 2020, and 2021.

b. Compute the residue income of 2020, and 2021.

c. Compute the bonus of both bonus plans (A&B) in 2020 and 2021.

d. Which plan (Plan A or Plan B) do you suggest to managers?

Reference no: EM132965760

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