By reference to the data in part A: 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?
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
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.
Required
1. Calculate the return on investment (ROI) and residual income (RI) for each division
of CarniTrin, 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
By reference to the data in part A:
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?
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