Case StudyFinancial performance measures are essential tools used by managers to evaluate the financialhealth of their organization. They provide an overview of the company's financialperformance, help identify areas of improvement, and support decision making.CarniTrin is a manufacturer of Carnival costumes in a highly competitive market. Thecompany's management team is seeking guidance on the use of financial performancemeasures to identify the key drivers of the company's financial performance and develop astrategy to improve it.The following data relate to the company for the year 2019:In its clothing division, the company has $4,000,000 invested in assets. After-taxoperating income from sales of clothing in 2019 is $700,000. Income for the clothingdivision has grown steadily over the last few years.• The cosmetics division has $12,000,000 invested in assets and an after-tax operatingincome in 2019 of $1,700,000.• The weighted-average cost of capital for CarniTrin is 10% and the 2018's after-taxreturn on investment for each division was 15%.• The general manager of CarniTrin has asserted that in future, managers should havetheir compensation structure aligned with their performance measures with no fixedsalaries. However, the general manager has told the manager of each division that thebetter division in 2019 will get a bonus. Part1. Calculate the return on investment (ROI) and residual income (RI) for each divisionof Carni Trin, and briefly explain which manager will get the bonus.2. Similar to RI another measure called economic value added (EVA) was brought to theattention of the general manager. The general manager requests that the accountantcalculate EVA adjusted incomes of clothing and cosmetics, and finds that the adjustedafter-tax operating incomes are $760,000 and $1,460,000, respectively. Also, theclothing division has $500,000 of current liabilities, while the cosmetics division hasonly $300,000 of current liabilities.Using the preceding information, calculate EVA, and discuss which division managerwill get the bonus. -3. What nonfinancial measures could CarniTrin use to evaluate divisional performances?Part B

Divisional performance measures are the measures that evaluate the performance of the divisions or…

1. Calculate the return on investment (ROI) and residual income (RI) for each division of Carni Trin, and briefly explain which manager will get the bonus. 2. Similar to RI another measure called economic value added (EVA) was brought to the attention of the general manager. The general manager requests that the accountant calculate EVA adjusted incomes of clothing and cosmetics, and finds that the adjusted after-tax operating incomes are $760,000 and $1,460,000, respectively. Also, the clothing division has $500,000 of current liabilities, while the cosmetics division has only $300,000 of current liabilities. Using the preceding information, calculate EVA, and discuss which division manager will get the bonus. - 3. What nonfinancial measures could CarniTrin use to evaluate divisional performances?

1. Calculate the return on investment (ROI) and residual income (RI) for each division of Carni Trin, and briefly explain which manager will get the bonus. 2. Similar to RI another measure called economic value added (EVA) was brought to the attention of the general manager. The general manager requests that the accountant calculate EVA adjusted incomes of clothing and cosmetics, and finds that the adjusted after-tax operating incomes are $760,000 and $1,460,000, respectively. Also, the clothing division has $500,000 of current liabilities, while the cosmetics division has only $300,000 of current liabilities. Using the preceding information, calculate EVA, and discuss which division manager will get the bonus. - 3. What nonfinancial measures could CarniTrin use to evaluate divisional performances?

Century 21 Accounting Multicolumn Journal

11th Edition

ISBN:9781337679503

Author:Gilbertson

Publisher:Gilbertson

Chapter17: Financial Statement Analysis

Section: Chapter Questions

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Concept explainers

Master Budget

A master budget can be defined as an estimation of the revenue earned or expenses incurred over a specified period of time in the future and it is generally prepared on a periodic basis which can be either monthly, quarterly, half-yearly, or annually. It helps a business, an organization, or even an individual to manage the money effectively. A budget also helps in monitoring the performance of the people in the organization and helps in better decision-making.

Sales Budget and Selling

A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future income and expenses.

Question

Case Study
Financial performance measures are essential tools used by managers to evaluate the financial
health of their organization. They provide an overview of the company's financial
performance, help identify areas of improvement, and support decision making.
CarniTrin is a manufacturer of Carnival costumes in a highly competitive market. The
company's management team is seeking guidance on the use of financial performance
measures to identify the key drivers of the company's financial performance and develop a
strategy to improve it.
The following data relate to the company for the year 2019:
In its clothing division, the company has $4,000,000 invested in assets. After-tax
operating income from sales of clothing in 2019 is $700,000. Income for the clothing
division has grown steadily over the last few years.
• The cosmetics division has $12,000,000 invested in assets and an after-tax operating
income in 2019 of $1,700,000.
• The weighted-average cost of capital for CarniTrin is 10% and the 2018's after-tax
return on investment for each division was 15%.
• The general manager of CarniTrin has asserted that in future, managers should have
their compensation structure aligned with their performance measures with no fixed
salaries. However, the general manager has told the manager of each division that the
better division in 2019 will get a bonus.

Part
1. Calculate the return on investment (ROI) and residual income (RI) for each division
of Carni Trin, and briefly explain which manager will get the bonus.
2. Similar to RI another measure called economic value added (EVA) was brought to the
attention of the general manager. The general manager requests that the accountant
calculate EVA adjusted incomes of clothing and cosmetics, and finds that the adjusted
after-tax operating incomes are $760,000 and $1,460,000, respectively. Also, the
clothing division has $500,000 of current liabilities, while the cosmetics division has
only $300,000 of current liabilities.
Using the preceding information, calculate EVA, and discuss which division manager
will get the bonus. -
3. What nonfinancial measures could CarniTrin use to evaluate divisional performances?
Part B

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1. Return on investment (ROI), residual income (RI), and economic-value added (EVA)
are performance measures for subunit managers. Discuss the relative merit of these
performance measures? -.
2. There may be a difference between the performance of a manager and the
performance of the organization subunit for which the manager is responsible. Why is
it important to make this distinction?
3. Do you agree with the general manager's assertion that managers should be rewarded
only on the basis of their performance measures with no fixed salaries? Explain.

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