Question
Bailey uses ROI to measure the performance of its operating divisions and to reward its division managers. A summary of the annual reports from two
Bailey uses ROI to measure the performance of its operating divisions and to reward its division managers. A summary of the annual reports from two of Baileys divisions is shown provided below. The companys weighted-average cost of capital is 12 percent.
| Division A | Division B | ||||||
| Total assets | $ | 6,240,000 | $ | 8,510,000 | |||
| Current liabilities | $ | 700,000 | $ | 1,850,000 | |||
| After-tax operating income | $ | 1,080,000 | $ | 1,214,400 | |||
| ROI | 20 | % | 12 | % | |||
a. Based on ROI, Division A generates more profit per dollar of invested capital than Division B. Compute the EVA for Division A and Division B.
c. Suppose the manager of Division A was offered a one-year project that would increase her investment base by $200,000 and increase her divisional operating income by $24,000. Would she be motivated to invest in this project?
| Part A | ||
| Division A | Divison B | |
| total assets | $ 6,240,000.00 | $ 8,510,000.00 |
| curret liabiltes | $ 700,000.00 | $ 1,850,000.00 |
| capital invested | $ 5,540,000.00 | $ 6,660,000.00 |
| WACC | 12% | 12% |
| c=a*b | $ 664,800.00 | $ 799,200.00 |
| Net Operating Income (D) | $ 1,080,000.00 | $ 1,214,400.00 |
| EVA = d-c | $ 415,200.00 | $ 415,200.00 |
| Part B | ||
| Invested | $ 200,000.00 | |
| Income | $ 24,000.00 | |
| 12% | NO 12%<20% |
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Cost Accounting A Managerial Emphasis
Authors: Horngren, Srikant Datar, George Foster, Madhav Rajan, Christ
6th Canadian edition
978-0132893534, 9780133389401, 132893533, 133389405, 978-0133392883
