division has $1,800,000 of current liabilities, while the cosmetics division has only $1,200,000 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? Explain. Case Study 1 Cari Trin is a manufacturer of Camival 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 2023: ⚫ In its clothing division, the company has $18,000,000 invested in assets. After-tax operating income from sales of clothing in 2023 is $2,700,000. Income for the clothing division has grown steadily over the last few years. The cosmetics division has $42,000,000 invested in assets and an after-tax operating income in 2023 of $5,700,000. ⚫ The weighted-average cost of capital for CarniTrin is 10% and the 2022's after-tax return on investment for each division was 15%. ⚫ The general manager of Cami Trin has asserted that in the 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 2023 will get a bonus. Required Part A 1. Calculate the return on investment (ROI) and residual income (RI) for each division of Cami Trin, and briefly explain which manager will get the bonus. 2. 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 $2,880,000 and $4,980,000, respectively. Also, the clothing
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 2023:
In its clothing division, the company has $18,000,000 invested in assets. After-taxoperating income from sales of clothing in 2023 is $2,700,000. Income for theclothing division has grown steadily over the last few years.
The cosmetics division has $42,000,000 invested in assets and an after-tax operatingincome in 2023 of $5,700,000.
The weighted-average cost of capital for CarniTrin is 10% and the 2022’s after-taxreturn on investment for each division was 15%.
The general manager of CarniTrin has asserted that in the future, managers shouldhave their compensation structure aligned with their performance measures with nofixed salaries. However, the general manager has told the manager of each divisionthat the better division in 2023 will get a bonus.
Required (complete part B only))
Part A 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.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 $2,880,000 and $4,980,000, respectively. Also, the clothing
division has $1,800,000 of current liabilities, while the cosmetics division has only $1,200,000 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? Explain.
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