Cora Manufacturing makes fashion products and competes on the basis of quality and leading-edge designs. The company has two divisions, clothing and cosmetics. Cora has $5,000,000 invested in assets in its clothing division. After-tax operating income from sales of clothing this year is $1,000,000. The cosmetics division has $12,500,000 invested in assets and an after-tax operating income this year of $2,000,000. The weighted- average cost of capital for Cora is 6%.
The CEO of Cora has told the manager of each division that the division that "performs best" this year will get a bonus.
Required
1. Calculate the ROI and residual income for each division of Cora Manufacturing, and briefly explain which manager will get the bonus. What are the advantages and disadvantages of each measure?
2. The CEO of Cora Manufacturing has recently heard of another measure similar to residual income called EVA. The CEO has the accountant calculate adjusted incomes for clothing and cosmetics and finds that the adjusted after-tax operating incomes are $634,200 and $2,181,600, respectively. Also, the clothing division has $470,000 of current liabilities, while the cosmetics division has only $380,000 of current liabilities. Using the preceding information, calculate the EVA for each division and discuss which manager will get the bonus.
3. What nonfinancial measures could Cora use to evaluate divisional performances?