Problem:
The manager of Watson Cosmetics's Perfume Division is evaluated on her division's return on investment and residual income. The company requires that all divisions generate a minimum return on invest assets of 8 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 percent of residual income in excess of $100,000. The Perfume Division's operating margin for the year was $9 million, during which time its average invested capital was $60 million.
a) Compute the Perfume Division's return on investment and residual income.
b) Will the manager of the Perfume Division receive a bonus for her performance? If so, how much will it be?
c) In reporting her investment center's performance for the past 10 years, the manager of the Perfume Division accounted for the depreciation of her division's assets by using an accelerated depreciation method allowed for tax purposes. As a result, virtually all of the assets under her control are fully depreciated. Given that the company's other division managers use straight-line depreciation, is her use of an accelerated method ethical? Defend your answer.