Fundamentals Of Cost Accounting (6th Edition)
6th Edition
ISBN: 9781259969478
Author: WILLIAM LANEN, Shannon Anderson, Michael Maher
Publisher: McGraw Hill Education
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Chapter 14, Problem 54P
Economic Value Added
Bisbee Health Products invests heavily in research and development (R&D), although it must currently treat its R&D expenditures as expenses for financial accounting purposes. To encourage investment in R&D. Bisbee evaluates its division managers using EVA. The company adjusts accounting income for R&D expenditures by assuming these expenditures create assets with a two-year life. That is, the R&D expenditures are capitalized and then amortized over two years.
Western Division of Bisbee shows after-tax income of $7.5 million for year 2. R&D expenditures in year 1 amounted to $3 million and in year 2. R&D expenditures were $4.8 million. For purposes of computing EVA. Bisbee assumes all R&D expenditures are made at the beginning of the year. Before adjusting for R&D, Western Division shows assets of $30 million at the beginning of year 2 and current liabilities of $600,000. Bisbee computes EVA using divisional investment at the beginning of the year and a 14 percent cost of capital.
Required
Compute EVA for Western Division for year 2.
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INVESTMENT CENTER: The AAA Division has permanent current assets of P50,000 and operating non-current assets of 350,000. It provides annual operating income after tax of P100,000. Its cost of capital is 15% but the minimum required rate of return by the entity is 16%.
How much is its current return on investment?
How much is its economic value added?
How much is its residual income?
Assume that the Senna Division is presented by the head office to manage a P60,000 investment option yielding a 20% return on its investment. Should the Division agree to manage this investment opportunity?
Yes, because the ROI will increase.
Yes, because the RI and EVA will increase.
No, because the ROI will decrease.
No, because the RI and EVA will decrease.
Return on investment
Commodore Entertainment has four profitable business segments, described as follows:
• Media Networks: Television and radio• Parks and Resorts: Resorts, including Commodore land• Studio Entertainment: Motion pictures, musical recordings, and stage plays• Consumer Products: Character merchandising, Commodore stores, books, and magazines
Commodore Entertainment recently reported sector income from operations, revenue, and invested assets as follows:
Income from Operations
Revenue
Invested Assets
Media Networks
$163,582
$735,200
$919,000
Parks and Resorts
73,625
353,400
589,000
Studio Entertainment
16,668
324,100
463,000
Consumer Products
80,164
352,800
196,000
a. Use the DuPont formula to determine the return on investment for the four Commodore Entertainment sectors. Round Profit Margin and ROI to one decimal place and Investment Turnover to two decimal places.
Profit Margin
Investment Turnover
ROI…
Financial and nonnancial performance measures, goal congruence. (CMA, adapted) Precision Equipment specializes in the manufacture of medical equipment, a eld that has become increasingly competitive. Approximately 2 years ago, Pedro Mendez, president of Precision, decided to revise the bonus plan (based, at the time, entirely on operating income) to encourage division managers to focus on areas that were important to customers and that added value without increasing cost. In addition to a protability incentive, the revised plan includes incentives for reduced rework costs,reduced sales returns, and ontime deliveries. The company calculates and rewards bonuses semiannually on the following basis: A base bonus is calculated at 2% of operating income; this amount is then adjusted as follows:
Chapter 14 Solutions
Fundamentals Of Cost Accounting (6th Edition)
Ch. 14 - What are the advantages of divisional income as a...Ch. 14 - How is divisional income like income computed for...Ch. 14 - How is return on investment (ROI) computed?Ch. 14 - What are the advantages of using an ROI-type...Ch. 14 - How can ratios, such as ROI, be used for control...Ch. 14 - How does residual income differ from ROI?Ch. 14 - How does EVA differ from residual income?Ch. 14 - What impact does the use of gross book value or...Ch. 14 - What are the dangers of using only business unit...Ch. 14 - A company prepares the master budget by taking...
Ch. 14 - Prob. 11CADQCh. 14 - What problems might there be if the same methods...Ch. 14 - Prob. 13CADQCh. 14 - The chapter identified some problems with ROI-type...Ch. 14 - Failure to invest in projects is not a problem...Ch. 14 - How would you respond to the following comment?...Ch. 14 - Prob. 17CADQCh. 14 - Prob. 18CADQCh. 14 - Prob. 19CADQCh. 14 - Prob. 20CADQCh. 14 - Prob. 21CADQCh. 14 - Compute Divisional Income Arlington Clothing,...Ch. 14 - Compute Divisional Income Refer to Exercise 14-22....Ch. 14 - Computing Divisional Income: Incomplete...Ch. 14 - Compute RI and ROI The Campus Division of...Ch. 14 - Prob. 26ECh. 14 - Compare Alternative Measures of Division...Ch. 14 - Comparing Business Units Using ROI Back Mountain...Ch. 14 - Comparing Business Units Using Residual Income...Ch. 14 - Prob. 30ECh. 14 - Universal Electronics, Inc. (UEI), which started...Ch. 14 - Comparing Business Units Using Residual...Ch. 14 - Comparing Business Units Using Economic Value...Ch. 14 - Impact of New Asset on Performance Measures The...Ch. 14 - Refer to the data in Exercise 14–34. The division...Ch. 14 - Refer to the information in Exercises 14–34 and...Ch. 14 - Impact of an Asset Disposal on Performance...Ch. 14 - Impact of an Asset Disposal on Performance...Ch. 14 - Compare Historical Cost, Net Book Value to Gross...Ch. 14 - Prob. 40ECh. 14 - Prob. 41ECh. 14 - Effects of Current Cost on Performance...Ch. 14 - Comparing Business Units Using Divisional Income,...Ch. 14 - Comparing Business Units Using Economic Value...Ch. 14 - Prob. 45PCh. 14 - Equipment Replacement and Performance Measures...Ch. 14 - Prob. 47PCh. 14 - Prob. 48PCh. 14 - Prob. 49PCh. 14 - Prob. 50PCh. 14 - Prob. 51PCh. 14 - Evaluate Performance Evaluation System: Behavioral...Ch. 14 - ROI, EVA, and Different Asset Bases Hys is a...Ch. 14 - Economic Value Added Bisbee Health Products...Ch. 14 - Prob. 55PCh. 14 - Prob. 56PCh. 14 - Refer to the information in Exercise 14-39. Assume...Ch. 14 - Refer to the information in Exercise 14-42. Assume...
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