Borders & Noble (B&N) operates 460 bookstores throughout North America and Europ...

Borders & Noble (B&N) operates 460 bookstores throughout North America and Europe. B&N has three divisions: retail division, college division, and the Web division. The retail division operates large stores selling both books and music. A typical store can have as many as 15,000 titles, covering the gamut of best-sellers, fiction, self-help, reference, travel, and so forth. The college division runs campus stores that primarily sell textbooks, apparel, and other assorted goods (stationery, snacks, computer supplies). The Web division sells books and music over the Internet, using its own computer system.

The retail division has a large warehouse where it receives books and music from publishers and repackages them in smaller lots for individual retail stores. The warehouse also receives textbooks and repackages them for the college division’s stores. Orders received by the Web division are forwarded electronically for packing and shipping by retail’s warehouse. In addition to paying for the cost of the books, the college and Web divisions pay the variable costs of handling and shipping the books from retail’s warehouse.

The financial statement for the warehouse for last year is:

Revenues in the warehouse from the Web and college divisions consist of the cost of books and music shipped from the warehouse and the warehouse’s direct handling costs (labor and freight). The handling costs charged to the Web and college divisions accurately reflect the variable costs of receiving, packaging, and shipping the books. Likewise, the books and music costs accurately reflect the costs paid to the publishers.

The operating data for the three divisions for last year were as follows:

Each division is treated as an investment center. Managers in each division are compensated based on their division’s EVA.

Required:

a. Compute each division’s EVA.

b. In addition to charging the college and Web divisions the variable costs of handling and shipping costs in the warehouse, the CFO of B&N decides to allocate the fixed costs of the warehouse to all three divisions. Fixed warehouse costs are allocated based on the cost of books and music processed through the warehouse. Compute each division’s revised net operating profit using the full cost (fixed and variable cost) of the warehouse.

c. Compute each division’s EVA using the revised handling charges in part (b).

d. Discuss the advantages and disadvantages of the alternate performance measures in parts (a) and (c).

e. Discuss possible distortions to the EVA calculations in part (c). (Assume WACC is measured accurately.)