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Managerial Accounting: The Corners...
Solutions
Managerial Accounting: The Corners...
Use the following information for Exercises 11-31 and 11-32:
Washington Company has two divisions: the Adams Division and the Jefferson Division. The following information pertains to last year’s results:
Washington’s actual cost of capital was 12%.
Exercise 11-31 Economic Value Added
Refer to the information for Washington Company above.
Required:
- 1. Calculate the EVA for the Adams Division.
- 2. Calculate the EVA for the Jefferson Division.
- 3. CONCEPTUAL CONNECTION Is each division creating or destroying wealth?
- 4. CONCEPTUAL CONNECTION Describe generally the types of actions that Washington’s management team could take to increase Jefferson Division’s EVA?
1.
Compute EVA for Division A.
Economic Value Added (EVA):
Economic value added can be evaluated by deducting the dollar amount of capital employed from the operating income after tax. The dollar amount of capital employed can be calculated by multiplying the capital employed by the percentage of the cost of capital.
Use the following formula to calculate the economic value added for Division A:
Substitute $605,000 for after-tax operating income, $4,000,000 for total capital employed and 12% for the actual percentage of the cost of capital in the above formula
2.
Compute EVA for Division J.
3.
Describe whether each division is creating or destroying wealth.
4.
State the actions to be considered by the company in order to increase the EVA of Division J.
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