CarniTrin is a manufacturer of Carnival costumes in a highly competitive market. The company's management team is seeking guidance on the use of financial performance measures to identify the key drivers of the company's financial performance and develop a strategy to improve it. The following data relate to the company for the year 2022: In its clothing division, the company has $6,000,000 invested in assets. After-tax operating income from sales of clothing in 2022 is $900,000. Income for the clothing division has grown steadily over the last few years. The cosmetics division has $14,000,000 invested in assets and an after-tax operating income in 2022 of $1,900,000. The weighted-average cost of capital for CarniTrin is 10% and the 2021’s after-tax return on investment for each division was 15%. The general manager of CarniTrin has asserted that in the future, managers should have their compensation structure aligned with their performance measures with no fixed salaries. However, the general manager has told the manager of each division that the better division in 2022 will get a bonus. Answer the following questions below: 1. Return on investment (ROI), residual income (RI), and economic-value added (EVA) are performance measures for subunit managers. Discuss the relative merit of these performance measures? 2. There may be a difference between the performance of a manager and the performance of the organization subunit for which the manager is responsible. Why is it important to make this distinction? 3. Do you agree with the general manager’s assertion that managers should be rewarded only on the basis of their performance measures with no fixed salaries? Explain with detailed examples to support your claims.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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CarniTrin is a manufacturer of Carnival costumes in a highly competitive market. The company's management team is seeking guidance on the use of financial performance measures to identify the key drivers of the company's financial performance and develop a strategy to improve it.

The following data relate to the company for the year 2022:

In its clothing division, the company has $6,000,000 invested in assets. After-tax operating income from sales of clothing in 2022 is $900,000. Income for the clothing division has grown steadily over the last few years.
The cosmetics division has $14,000,000 invested in assets and an after-tax operating income in 2022 of $1,900,000.
The weighted-average cost of capital for CarniTrin is 10% and the 2021’s after-tax return on investment for each division was 15%.
The general manager of CarniTrin has asserted that in the future, managers should have their compensation structure aligned with their performance measures with no fixed salaries. However, the general manager has told the manager of each division that the better division in 2022 will get a bonus.

Answer the following questions below:

1. Return on investment (ROI), residual income (RI), and economic-value added (EVA) are performance measures for subunit managers. Discuss the relative merit of these performance measures?

2. There may be a difference between the performance of a manager and the performance of the organization subunit for which the manager is responsible. Why is it important to make this distinction?

3. Do you agree with the general manager’s assertion that managers should be rewarded only on the basis of their performance measures with no fixed salaries? Explain with detailed examples to support your claims.

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