A toy plastic cars company manufacturers car at a normal volume of 280,000 cars per year sold at the normal selling price of $25 per car, costs are as follows (per car):

Variable manufacturing costs: ..................8.20,

Fixed manufacturing costs:....................... 3.90,

Total Manufacturing Cost:........................12.10

Variable selling Cost:.................................... 2.7,

Fixed Selling Cost:........................................0.75

Total Selling Cost:.........................................3.45

Total Cost:...................................................15.55

The manufacturer’s division has net operating assets of $15 million. Assume the company pays no income taxes and makes no adjustments to profit or net operating assets (such as for R&D, Marketing, for example) to calculate EVA. The company’s WACC is 11%.

1) Compute the ROI and EVA the company using the normal volume, selling price and costs noted above. Use the following equation to calculate ROI for this problem: ROI = Profit ÷ Net Operating Assets

2) Customer from an untapped foreign market has offered to make a one-time purchase of 12,000 cars for $15.75 per car. Shipping will cost $3.00 per car, but no other selling costs will be incurred on this order. The division has spare capacity, so current sales will not be affected. However, accepting the order will require the division to invest $400,000 in additional operating assets for the year.

a) If the manager of the division, receives a bonus based on ROI, do you think he will accept the offer? Support your answer with the appropriate computations

b) If the manager receives a bonus based on EVA instead, do you think he will accept the offer? Support your answer with the appropriate computations.

3) Write a brief memo (one thoughtful paragraph will suffice) to the company’s board of directors recommending one of the above performance metrics and explaining why you recommend one metric over another.