FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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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
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.
Required
Part A
1. Calculate the return on investment (ROI) and residual income (RI) for each division of CarniTrin, and briefly explain which manager will get the bonus.
2. Another measure called economic value added (EVA) was brought to the attention of the general manager. The general manager requests that the accountant calculate EVA adjusted incomes of clothing and cosmetics, and finds that the adjusted after-tax operating incomes are $960,000 and $1,660,000, respectively. Also, the clothing division has $600,000 of current liabilities, while the cosmetics division has only $400,000 of current liabilities.Using the preceding information, calculate EVA, and discuss which division manager will get the bonus.
3. What nonfinancial measures could CarniTrin use to evaluate divisional performances?
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