Horngren's Cost Accounting: A Managerial Emphasis (16th Edition)
16th Edition
ISBN: 9780134475585
Author: Srikant M. Datar, Madhav V. Rajan
Publisher: PEARSON
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Textbook Question
Chapter 23, Problem 23.27E
ROI, RI, EVA. Performance Auto Company operates a new car division (that sells high-performance sports cars) and a performance parts division (that sells performance-improvement parts for family cars). Some division financial measures for 2017 are as follows:
- 1. Calculate
return on investment (ROI) for each division using operating income as a measure of income and total assets as a measure of investment. - 2. Calculate residual income (RI) for each division using operating income as a measure of income and total assets minus current liabilities as a measure of investment.
- 3. William Abraham, the new car division manager, argues that the performance parts division has loaded up on a lot of short-term debt” to boost its RI. Calculate an alternative RI for each division that is not sensitive to the amount of short-term debt taken on by the performance parts division. Comment on the result.
- 4. Performance Auto Company, whose tax rate is 40%, has two sources of funds: long-term debt with a market value of $18,000,000 at an interest rate of 10% and equity capital with a market value of $12,000,000 and a
cost of equity of 15%. Applying the same weighted-average cost of capital (WACC) to each division, calculate EVA for each division. - 5. Use your preceding calculations to comment on the relative performance of each division.
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Performance Auto Company operates a new car division (that sells high performance sports cars) and a performance parts division (that sells performance-improvement parts for family cars). Some division financial measures for 2017 are as follows:
E (Click the icon to view the data.)
Read the requirements.
Data table
rounded to one decimal place in the format X.X%.)
Requirements
New Car
Performance
1. Calculate return on investment (ROI) for each division using operating income
as a measure of income and total assets as a measure of investment.
Division
Parts Division
2. Calculate residual income (RI) for each division using operating income as a
Total assets
2$
35,000,000 $
32,312,500
measure of income and total assets minus current liabilities as a measure of
investment.
Current liabilities
2$
6,500,000 $
৪,000,000
3. William Abraham, the New Car Division manager, argues that the performance
parts division has "loaded up on a lot of short-term debt" to boost its RI.
Operating income
$4…
Analyzing profitability
Camden Company has divided its business into segments based on sales territories: East Coast, Midland, and West Coast. Following are financial data for 2018:
Prepare an income statement for Camden Company for 2018 using the contribution margin format assuming total fixed costs for the company Were $435,000. Include columns for each business segment and a column for the total company.
Profit Margin, Investment Turnover, and return on investment
The condensed income statement for the Consumer Products Division of Fargo Industries Inc. is as follows (assuming no service department charges):
Sales
Cost of goods sold
Gross profit
Administrative expenses
Income from operations
The manager of the Consumer Products Division is considering ways to increase the return on investment.
a. Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and return on investment of the Consumer Products Division, assuming that $1,950,000 of assets have been
invested in the Consumer Products Division. Round the investment turnover to one decimal place.
Profit margin
Investment turnover
Rate of return on investment
Profit margin
Investment turnover
$1,170,000
526,500
$643,500
409,500
$234,000
b. If expenses could be reduced by $58,500 without decreasing sales, what would be the impact on the profit margin, investment turnover, and return on…
Chapter 23 Solutions
Horngren's Cost Accounting: A Managerial Emphasis (16th Edition)
Ch. 23 - Prob. 23.1QCh. 23 - Prob. 23.2QCh. 23 - What factors affecting ROI does the DuPont method...Ch. 23 - RI is not identical to ROI, although both measures...Ch. 23 - Describe EVA.Ch. 23 - Give three definitions of investment used in...Ch. 23 - Distinguish between measuring assets based on...Ch. 23 - Prob. 23.8QCh. 23 - Why is it important to distinguish between the...Ch. 23 - Prob. 23.10Q
Ch. 23 - Managers should be rewarded only on the basis of...Ch. 23 - Explain the role of benchmarking in evaluating...Ch. 23 - Explain the incentive problems that can arise when...Ch. 23 - Prob. 23.14QCh. 23 - Prob. 23.15QCh. 23 - During the current year, a strategic business unit...Ch. 23 - Assuming an increase in price levels over time,...Ch. 23 - If ROI Is used to evaluate a managers performance...Ch. 23 - The Long Haul Trucking Company is developing...Ch. 23 - ABC Inc. desires to maintain a capital structure...Ch. 23 - ROI, comparisons of three companies. (CMA,...Ch. 23 - Prob. 23.22ECh. 23 - ROI and RI. (D. Kleespie, adapted) The Sports...Ch. 23 - ROI and RI with manufacturing costs. Excellent...Ch. 23 - ROI, RI, EVA. Hamilton Corp. is a reinsurance and...Ch. 23 - Goal incongruence and ROI. Comfy Corporation...Ch. 23 - ROI, RI, EVA. Performance Auto Company operates a...Ch. 23 - Capital budgeting, RI. Ryan Alcoa, a new associate...Ch. 23 - Prob. 23.29ECh. 23 - ROI, RI, EVA, and performance evaluation. Cora...Ch. 23 - Prob. 23.31ECh. 23 - Prob. 23.32ECh. 23 - ROI performance measures based on historical cost...Ch. 23 - ROI, measurement alternatives for performance...Ch. 23 - Multinational firms, differing risk, comparison of...Ch. 23 - ROI, Rl, DuPont method, investment decisions,...Ch. 23 - Division managers compensation, levers of control...Ch. 23 - Executive compensation, balanced scorecard. Acme...Ch. 23 - Financial and nonfinancial performance measures,...Ch. 23 - Prob. 23.40PCh. 23 - Prob. 23.41PCh. 23 - RI, EVA, measurement alternatives, goal...
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