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Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins
Edition 5ISBN: 0073526940Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins
Edition 5ISBN: 0073526940ROI, Residual Income, and EVA® Jean Cooper Cosmetics (JCC) manufactures a variety of products and is organized into three divisions (investment centers): soap products, skin lotions, and hair products. Information about the most recent year’s operations follows. The information includes the value of intangible assets including research and development, patents, and other innovations that are not included on JCC’s balance sheet. Were these intangibles to be included in the financial statements (as they are for EVA®), the increase in the balance sheet and the increase in after-tax operating income are as given below.
Division | Operating Income | Average Total Assets | Value of Intangibles | Intangibles’ Effect on Income |
Soap products | $3,250,000 | $60,000,000 | $1,500,000 | $1,000,000 |
Skin lotion s | 2,750,000 | 33,000,000 | 8,000,000 | 6,000,000 |
Hair products | 5,000,000 | 55,000,000 | 1,000,000 | 700,000 |
Minimum desired rate of return | 5.00% |
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Cost of capital | 4.00% |
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Required
1. Calculate the ROI for each division.
2. Calculate the residual income (RI) for each division.
3. Calculate EVA® for each division and comment on your answers for ROI, RI, and EVA®.
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The formula for calculating residual return RI is as follows:
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