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Cindy Apparel makes fashion products and competes on the basis of quality and leading edge designs. The company has two divisions, clothing and cosmetics. The
Cindy Apparel makes fashion products and competes on the basis of quality and leading edge designs. The company has two divisions, clothing and cosmetics. The division financial measures for 2020 are as follows: Total assets Current liabilities Operating income Weighted average cost of capital Clothing Cosmetics Division Division $5,500,000 $13,000,000 480,000 360,000 $1,000,000 $2,000,000 5% 5% The CEO of Cindy Apparel has told the manager of each division that the division that performs best" this year will get a bonus. Question 7 is continued on the next page ACCY312 (FAA)/ Page 6 of 6 Question 7 continued Required: (a) Calculate the ROI and Residual Income for each division of Cindy Apparel, and briefly explain which manager will get the bonus. (8 marks) (b) The CEO has the accountant calculate EVA-adjusted incomes for clothing and cosmetics and finds that the adjusted after-tax operating incomes are $650,000 and $2,280,000, respectively. Using the preceding information, calculate the EVA for each division and discuss which manager will get the bonus. (7 marks)
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