Question

You have decided not to go into a business partnership with your friend Sukhdeep as you are certain that he can not be trusted as he continues to behave in an unethical manner. Sukhdeep was a deceitful student often attempting to mislead his teachers at Yorkville. He has continued with this unethical behavior in his working life, and you are convinced he will not be successful. On the other hand, your reputation as a strong Managerial Accountant as well as an honest and ethical individual has been recognized by other organization's and you have now been offered a position as senior director of a fashion company now earning $194,000 per year plus a 35% annual bonus. Your new company Fashionista Inc. has two divisions Clothing and Make-up. Below are the financial figures for each division, and the company uses a weighted average cost of capital of 15%. Clothing Make-up Assets $2,300,000 5,700,000 Operating Income after tax 600,000 1,425,000 Your new boss has asked you to do the following Required 1. Calculate the ROI and residual income for each division of Fashionista Inc, and briefly explain which division is performing better. What are the advantages and disadvantages of each measure? 2. The CEO of Fashionista has recently heard of another measure similar to residual income called EVA. The CEO has asked you to calculate EVA adjusted incomes of clothing and make-up and finds that the adjusted after-tax operating incomes are $548,000 and $1,047,200, respectively. Also, the clothing division has $320,000 of current liabilities, while the make-up division has only $230,000 of current liabilities. Using the preceding information, calculate EVA and discuss which division is performing better. 3. What nonfinancial measures could Fashionista use to evaluate divisional performance

Answer 1

calculation Return on investoren of Return on investment Profil toted Assets bo clothing y 1 267. 600000 23 00 000 X100 Make-up 252 1425000 5700000 X100 Disadvantage of Rot decrease the Dreisenal ROI be decisica which but may make Advantage of ROI Ideal comparison across corporate Diuision for companies of Sirrilar size and similar schon Easy to understand, compute and evaluate performance may on of dupport Goal Conqurance, since there can may Ч as whole bebler off- Woes not crecognize the effect of one iuision's decision On the other corporate Etuisim Analysis ! Clothing division peperming beter than make up dãuiston as per Ros'o budaler den Buthat becaux clothing division higher then make-up diuision. Blues Residual. en come approach. ) Profil - cost of capital. X Domestment (Assets) clothing GOOOoo - 0.15X 2300000 a 리 1425000 0.15 X S700000 n Brnalysis: - Make up diuinion performance is better then clothing division because Resideral income of makeup division is higher than clothing division, above shows that RI is subject to size Effect but ROI és not larger size of mastup viuision (which is more than 2times of clothing supt) overcome its lower profitability as measured by ROI. () $ 2.55 000 6 590bov make up Y

also to och in the best test of the Orvall Cowymwy. disadvenkage of RT ! Performante comparison durfti haion ay in be Encouraged, Advantage of Rs. There is a greater probe obaletity that countered in any manns when act in their own bell sex, different size Calculation Dision EVA ND PAT of Economic value a aldeal of clothing WACC X Capital employcel Pothi reet operating profit After tard &. $548 000 Mote NO PAT is computed operating filmy a tund erp + 2 Profit after tan & Interest & (100% tarrate, Intrusterependermokoloured collea! adiusred NOPAT de profit After tan. WACC 152 Assets Capital employed of clothing current liabilities $ 320000 y $2300000 7. $ 1980000 EVA of c), 548000 - 0.15 x 1980000 clothing $25000 (in EVA of च make up 1047200 - 0.15X SYA0000 of $ 226700 Copeo full employed of 45200000 485200000 - 290000 make up y $5440000 better than - Analysis ! & make up Division performing clothing division becauen era of makeup lubin es more than clothing Diuision,

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