Reference no: EM132556621

Smashing Sportz Corporation (SSC) recently announced a bonus plan to be awarded to the manager of the most profitable division. The three divisional managers are to choose whether Return on Investment (ROI) or Residual Income (RI) will be used to measure profitability for their division. In addition, they must decide whether investment will be measured using Gross Book Value or Net Book Value of assets. SSC defines income as operating income and investment as total assets.

The following information is available for the year just ended:

Division                    Gross Book Value             Accumulated                 Operating

                                of assets                                  depreciation                    Income

Shuttles                 $800,000                             $430,000                  $94,700

Racquets               760,000                              410,000                       91,700

Accessories               500,000                            280,000                       61,400

SSC uses a required rate of return of 10% on investment to calculate RI.

Each division manager has selected a method of profitability calculation that ranks his or her division as number 1 among the three divisions.

Required:

Question A. Identify the method that each manager will have selected to calculate profitability, and support your answer with calculations covering all possible options, showing clearly why each manager would have selected a particular method.

Question B. Comment on the strengths and weaknesses of the two methods of profitability calculations used with reference to Smashing Sportz Corporation (SSC).