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Stella Manufacturing makes fashion products and competes on the basis of quality and leading-edge designs. The company has Sl hwested in assets in its clothing
Stella Manufacturing makes fashion products and competes on the basis of quality and leading-edge designs. The company has Sl hwested in assets in its clothing manufacturing division. Alter-ta: operating income from sales of clothing this year is 51 ,5ill1,l]. The cosmetics division has Sill invested in assets and an aftertax operating income this year of 53!] [Lilll]. Income for the clothing division has grown steadily over the past few yea rs. The weightedaverage cost of capital for Stella is "ft-ta. The CEO of Stella has told the manager of each division that the division that "performs best" this year will get a bonus. Read the gmirements. If Stella Manufactua'ing uses RD]. then the manager of the divisinn will get the bonus. If Stella Manufacturing uses Fit. then the manager at the divisicn will get the bnnus. What are the advantages and disadvantages of each measure? First. match each measure with its advantage. l1] This measure is easy tu- calculate and easy ta understand. It combines revenue. cast, and investment into a single number, sc that managers can clearly see what can be changed to increase returns. This measure has the advantage of goal congruence because any investment that eams mare than the required capital charge increases the measure and thereby increases the managers' performance evaluations. New match each measure with its disadvantage. This measure is net as easy to measure because it requires the cempanv to determine the amnllnt nf canilal and the. cast at canilal fnr each business unit
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