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Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher
Edition 3ISBN: 0073527114Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher
Edition 3ISBN: 0073527114Compare Alternative Measures of Division Performance
The following data are available for two divisions of Solomons Company:
| North Division | South Division |
Division operating profit. | $ 7,000,000 | $ 39,000,000 |
Division investment | 28,000,000 | 260,000,000 |
The cost of capital for the company is 10 percent. Ignore taxes.
Required
a. If Solomons measures performance using ROI, which division had the better performance?
b. If Solomons measures performance using economic value added, which division had the better performance? (The divisions have no current liabilities.)
c. Would your evaluation change if the company’s cost of capital were 20 percent?
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Economic value added
Economic value added refers to additional profit earned by company over the cost incurred to finance capital of company that is it calculates the economic benefit added.
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