Ruby Manufacturing makes fashion products and competes on the basis of quality and leading-edge designs. The...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Ruby Manufacturing makes fashion products and competes on the basis of quality and leading-edge designs. The company has $2,500,000 invested in assets in its clothing manufacturing division. After-tax operating income from sales of clothing this year is $550,000. The cosmetics division has $11,000,000 invested in assets and an after-tax operating income this year of $1,650,000. Income for the clothing division has grown steadily over the past few years. The weighted-average cost of capital for Ruby is 8%. The CEO of Ruby has told the manager of each division that the division that "performs best" this year will get a bonus. Read the requirements. Requirements 1. Calculate the ROI and residual income for each division of Ruby Manufacturing, and briefly explain which manager will get the bonus. What are the advantages and disadvantages of each measure? 2. The CEO of Ruby Manufacturing has recently heard of another measure similar to residual income called EVA. The CEO has the accountant calculate EVA adjusted incomes of clothing and cosmetics, and finds that the adjusted after-tax operating incomes are $401,400 and $2,067,200, respectively. Also, the clothing division has $270,000 of current liabilities, while the cosmetics division has only $120,000 of current liabilities. Using the preceding information, calculate EVA, and discuss which division manager will get the bonus. 3. What nonfinancial measures could Ruby use to evaluate divisional performances? - Requirement 1. Calculate the ROI and residual income for each division of Ruby Manufacturing, and briefly explain which manager will get the bonus. What are the advantages and disadvantages of each measure? Begin by selecting the formula to calculate ROI, then compute the ROI for each division. Clothing Division Cosmetics Division Now select the formula to calculate RI, then compute the RI for each division. Clothing Division Cosmetics Division If Ruby Manufacturing uses ROI, then the manager of the What are the advantages and disadvantages of each meas First, match each measure with its advantage. = ROI % % RI division will get the bonus. If Ruby Manufacturing uses RI, then the manager of the division will get the bonus. clothing This measure is easy to calcu be changed to increase returr This measure has the advant increases the managers' performance evaluations. rstand. It combines revenue, cost, and investment into a single number, so that managers can clearly see what can cosmetics ce because any investment that earns more than the required capital charge increases the measure and thereby Now match each measure with its disadvantage. This measure is not as easy to measure because it requires the company to determine the amount of capital and the cost of capital for each business unit. Managers who are evaluated based on this measure have incentives to reject investments that, from the viewpoint of the company as a whole, should be accepted. Requirement 2. Using the information given, calculate EVA, and discuss which division manager will get the bonus. Begin by calculating the revised ROI for each division using the EVA definition of operating income and assets. (Round your answers to two decimal places, X.XX%.) Clothing Division Cosmetics Division ROI % % Now select the formula to calculate EVA, then compute the EVA for each division. (Enter any percentage as a ratio to two decimal places, X.XX.) Clothing Division: Cosmetics Division: x ( ( ( )) = EVA The manager of the division will get the bonus because are(is) higher than the other division. Requirement 3. What nonfinancial measures could Ruby use to evaluate divisional performances? (Complete all answer boxes.) a. b. C. d. Ruby Manufacturing makes fashion products and competes on the basis of quality and leading-edge designs. The company has $2,500,000 invested in assets in its clothing manufacturing division. After-tax operating income from sales of clothing this year is $550,000. The cosmetics division has $11,000,000 invested in assets and an after-tax operating income this year of $1,650,000. Income for the clothing division has grown steadily over the past few years. The weighted-average cost of capital for Ruby is 8%. The CEO of Ruby has told the manager of each division that the division that "performs best" this year will get a bonus. Read the requirements. Requirements 1. Calculate the ROI and residual income for each division of Ruby Manufacturing, and briefly explain which manager will get the bonus. What are the advantages and disadvantages of each measure? 2. The CEO of Ruby Manufacturing has recently heard of another measure similar to residual income called EVA. The CEO has the accountant calculate EVA adjusted incomes of clothing and cosmetics, and finds that the adjusted after-tax operating incomes are $401,400 and $2,067,200, respectively. Also, the clothing division has $270,000 of current liabilities, while the cosmetics division has only $120,000 of current liabilities. Using the preceding information, calculate EVA, and discuss which division manager will get the bonus. 3. What nonfinancial measures could Ruby use to evaluate divisional performances? - Requirement 1. Calculate the ROI and residual income for each division of Ruby Manufacturing, and briefly explain which manager will get the bonus. What are the advantages and disadvantages of each measure? Begin by selecting the formula to calculate ROI, then compute the ROI for each division. Clothing Division Cosmetics Division Now select the formula to calculate RI, then compute the RI for each division. Clothing Division Cosmetics Division If Ruby Manufacturing uses ROI, then the manager of the What are the advantages and disadvantages of each meas First, match each measure with its advantage. = ROI % % RI division will get the bonus. If Ruby Manufacturing uses RI, then the manager of the division will get the bonus. clothing This measure is easy to calcu be changed to increase returr This measure has the advant increases the managers' performance evaluations. rstand. It combines revenue, cost, and investment into a single number, so that managers can clearly see what can cosmetics ce because any investment that earns more than the required capital charge increases the measure and thereby Now match each measure with its disadvantage. This measure is not as easy to measure because it requires the company to determine the amount of capital and the cost of capital for each business unit. Managers who are evaluated based on this measure have incentives to reject investments that, from the viewpoint of the company as a whole, should be accepted. Requirement 2. Using the information given, calculate EVA, and discuss which division manager will get the bonus. Begin by calculating the revised ROI for each division using the EVA definition of operating income and assets. (Round your answers to two decimal places, X.XX%.) Clothing Division Cosmetics Division ROI % % Now select the formula to calculate EVA, then compute the EVA for each division. (Enter any percentage as a ratio to two decimal places, X.XX.) Clothing Division: Cosmetics Division: x ( ( ( )) = EVA The manager of the division will get the bonus because are(is) higher than the other division. Requirement 3. What nonfinancial measures could Ruby use to evaluate divisional performances? (Complete all answer boxes.) a. b. C. d.
Expert Answer:
Related Book For
Cost Accounting A Managerial Emphasis
ISBN: 978-0136126638
13th Edition
Authors: Charles T. Horngren, Srikant M.Dater, George Foster, Madhav
Posted Date:
Students also viewed these accounting questions
-
Cora Manufacturing makes fashion products and competes on the basis of quality and leading- edge designs. The company has $ 2,500,000 invested in assets in its clothing manufacturing division. After-...
-
Lada Manufacturing makes fashion products and competes on the basis of quality and leading edge designs. The company has $3,000,000 invested in assets in its clothing manufacturing division....
-
There are different types of non-probability sampling methods. Below are examples of such methods. You are required to go through them and (for each example); a. Name the Sample Method b. Write a not...
-
Predict the effect of decreasing the temperature on this equilibrium. N2O4 + 57 KJ + 2NO2
-
You forecast that Integrated plc will pay a dividend of 24 pence next year and that dividends will grow at a rate of 9 percent a year. What price would you expect to see for Integrated's stock if the...
-
A spherical particle of radius \(r_{1}=5 \mathrm{~mm}\) is suspended by a thin wire within a cylindrical tube of inner radius \(r_{2}=15 \mathrm{~mm}\) and length \(L=0.5 \mathrm{~m}\). Determine the...
-
Harmony Audio Inc. manufactures two products: receivers and CD players. The factory overhead incurred is as follows: Indirect labor $210,000 Subassembly Department ......145,000 Final Assembly...
-
In a local bar, a customer slides an empty beer mug down the counter for a refill. The bartender is momentarily distracted by the soul-crushing emptiness in his life and does not see the mug, which...
-
Draw a flowchart for the following problems. Answers should follow all flowchart rules including a variable list and variables. 1. Holiday Lights (30 points) You've been asked to help your friend...
-
List three conditions for perfect competition.
-
Why must buyers and sellers be price takers for a market to be perfectly competitive?
-
Classify the following nudges as either a potentially advantageous default nudge, an information or encouragement nudge, or not a nudge. a. A firm redesigns its health enrollment form so that...
-
What will be the effect of a technological development that reduces marginal costs in a competitive market on short-run price, quantity, and profit?
-
If a firm is owned by its workers but otherwise meets all the qualifications for a perfectly competitive firm, will its price and output decisions differ from the price and output decisions of a...
-
Watch the movie The French wordmise-en-scene literally means staging or putting on a scene. And answer the following questions: 1. As you watch the film, be alert to the mise-en-scene and to your...
-
Let (X. A. p) be a measure space. Show that for any A,B A, we have the equality: (AUB)+(An B) = (A) + (B).
-
Create two scenarios other than those given in this chapter, where the temptation pattern can be used.
-
What are the capabilities required to achieve temptation? Describe each of them.
-
List some design and implementation issues faced, when implementing the temptation pattern. Explain each issue.
Study smarter with the SolutionInn App