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 year's operations follows. The information includes the value of intangible assets, including research and development, patents, and other innovations that are not included on HSC's bala sheet. Were these intangibles to be included in the financial statements (as they are for EVA), the increase in the balance sheet an the increase in after-tax operating income would be as given below: Soap products Skin lotions Division Hair products Minimum desired rate of return Cost of capital Required: Operating Income $ 3,250,000 2,750,000 5,000,000 5.00% 4.00% Average Total Assets $ 60,000,000 33,000,000 55,000,000 Value of Intangibles $ 1,500,000 8,000,000 1,000,000 Intangibles Effect on Income $ 1,000,000 6,000,000 700,000 1. Calculate the return on investment (ROI) for each division. (Round your answers to 2 decimal places. (i.e. .1234 = 12.34%)) 2. Calculate the residual income (RI) for each division. 3. Calculate EVA for each division. Answer is complete but not entirely correct. Soap Products 1. Return on investment (ROI) 5.00% 2. Residual income (RI) $ 250,000 $ Skin Lotions 8.00% 110,000x $ 2,250,000 Hair Products 9.00 % 3. EVA® $ 1,790,000 $ 7,110,000 $ 3,460,000
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 year's operations follows. The information includes the value of intangible assets, including research and development, patents, and other innovations that are not included on HSC's bala sheet. Were these intangibles to be included in the financial statements (as they are for EVA), the increase in the balance sheet an the increase in after-tax operating income would be as given below: Soap products Skin lotions Division Hair products Minimum desired rate of return Cost of capital Required: Operating Income $ 3,250,000 2,750,000 5,000,000 5.00% 4.00% Average Total Assets $ 60,000,000 33,000,000 55,000,000 Value of Intangibles $ 1,500,000 8,000,000 1,000,000 Intangibles Effect on Income $ 1,000,000 6,000,000 700,000 1. Calculate the return on investment (ROI) for each division. (Round your answers to 2 decimal places. (i.e. .1234 = 12.34%)) 2. Calculate the residual income (RI) for each division. 3. Calculate EVA for each division. Answer is complete but not entirely correct. Soap Products 1. Return on investment (ROI) 5.00% 2. Residual income (RI) $ 250,000 $ Skin Lotions 8.00% 110,000x $ 2,250,000 Hair Products 9.00 % 3. EVA® $ 1,790,000 $ 7,110,000 $ 3,460,000
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter10: Decentralization: Responsibility Accounting, Performance Evaluation, And Transfer Pricing
Section: Chapter Questions
Problem 31P
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Transcribed Image Text: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 year's operations follows. The information includes the
value of intangible assets, including research and development, patents, and other innovations that are not included on HSC's 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:
Soap products
Skin lotions
Division
Hair products
Minimum desired rate of return
Cost of capital
Required:
Operating
Income
$ 3,250,000
2,750,000
5,000,000
5.00%
4.00%
Average Total
Assets
$ 60,000,000
33,000,000
55,000,000
Value of
Intangibles
$ 1,500,000
8,000,000
1,000,000
Intangibles'
Effect on
Income
$ 1,000,000
6,000,000
700,000
1. Calculate the return on investment (ROI) for each division. (Round your answers to 2 decimal places. (i.e. .1234 = 12.34%))
2. Calculate the residual income (RI) for each division.
3. Calculate EVA for each division.
Answer is complete but not entirely correct.
Soap Products
Skin Lotions
Hair Products
1.
Return on investment (ROI)
5.00%
8.00%
9.00 %
2.
Residual income (RI)
$
250,000
$
110,000x
$ 2,250,000
3.
EVA Ⓡ
$
69
1,790,000
$ 7,110,000
$ 3,460,000
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