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 return on investment for each division was 15%. 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. 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. Answer Quickly!

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter10: Forecasting Financial Statement

Section: Chapter Questions

Problem 9PC: The Home Depot is a leading specialty retailer of hardware and home improvement products and is the...

See similar textbooks

Related questions

Question

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 return on investment for each division was 15%.
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.

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.

Answer Quickly!

Expert Solution

Step by step

Solved in 3 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.