Question

XLS 10-28 Evaluating segment performance (LO 3, 4) Mims Corporation recently announced a bonus plan to reward the manager of its most profitable division. The three divisional managers are to decide which performance measure will be used to evaluate prof- itability. Mims Corporation requires a 10% minimum return on investment. The following information is available for the year just ended. Division Gross Book Value of Assets Divisional Operating Income Ashton $900,000 $99,000 Drye 820,000 94,300 Poole 480,000 57,600 Required a. Based on return on investment, which division performed the best? 0. Based on residual income, which division performed the best?

Answer 1

Return on investment = operating income/operating assets

Ashton = 99000/900,000 =11%

Dyre = 94300/820000 =11.5%

Poole = 57600/480,000 = 12%

Poole division performed the best

B. Residual income = divisional operating income- operating assets * required rate of return

Ashton = 99000-900000*10% =$9,000

Dyre = 94300 - 820000*10% =$12300

Poole = 57600- 48000*10% =$9600

Dyre division performed the best

C. EVA = Net operating profit after tax- operating assets*WACC

Ashton = 99000/(1-30%) - 900,000*8%

=$69428.57

Dyre = 69114.29

Poole = 43885.71

Ashton division performed best

D.should select economic value added as it is a better measure