Question
Heather Smith Cosmetics (HSC) manufactures a variety of products and is organized into three divisions (investment centers): soap products, skin lotions, and hair products. Information
Heather Smith Cosmetics (HSC) manufactures a variety of products and is organized into three divisions (investment centers): soap products, skin lotions, and hair products. Information about the most recent years operations follows. The information includes the value of intangible assets, including research and development, patents, and other innovations that are not included on HSCs balance sheet. Were these intangibles to be included in the financial statements (as they are for EVA), the increase in the balance sheet and the increase in after-tax operating income would be as given below:
| Division | Operating Income | Average Total Assets | Value of Intangibles | Intangibles Effect on Income | ||||||||
| Soap products | $ | 3,244,000 | $ | 59,994,000 | $ | 1,494,000 | $ | 994,000 | ||||
| Skin lotions | 2,744,000 | 32,994,000 | 7,994,000 | 5,994,000 | ||||||||
| Hair products | 4,994,000 | 54,994,000 | 994,000 | 694,000 | ||||||||
| Minimum desired rate of return | 5.00 | % | ||||||||||
| Cost of capital | 4.00 | % | ||||||||||
| 2. Calculate the residual income (RI) for each division. 3. Calculate EVA for each division. | ||||||||||||
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Cost Management A Strategic Emphasis
Authors: Edward Blocher, David Stout, Paul Juras, Gary Cokins
7th edition
77733770, 978-0077733773
