Home Insert Page Layout Formulas Data Review View Key West Phoenix Carmel Total 2 Revenues 3 Variable costs 4 Fixed costs 5 Operating income 6 Interest costs on long-term debt at 8% 7 Income before taxes 8 Net income after 35% taxes $4,100,000 1,600,000 1,280,000 1,220,000 368,000 852,000 $4,380,000 1,630,000 1,560,000 $3,230,000 955,000 980,000 $11,710,000 4,185,000 3,820,000 3,705,000 1,224,000 2,481,000 1,190,000 416,000 1,295,000 440,000 855,000 774,000 553,800 503,100 555,750 1,612,650 10 Net book value at 2017 year-end: 11 Current assets 12 Long-tem assets 13 Total assets $ 850,000 5,462,000 6,312,000 $ 2,730,000 17,172,000 19,902,000 $1,280,000 4,875,000 6,155,000 $ 600,000 6,835,000 7,435,000 14 15 Current liabilities 16 Long-term debt 17 Stockholders' equity 18 Total liabilities and stockholders' equity 330,000 4,600,000 1,225,000 6,155,000 265,000 5,200,000 847,000 84,000 5,500,000 1,851,000 7,435,000 679,000 15,300,000 3,923,000 19,902,000 6,312,000 19 20 Market value of debt 21 Market value of equity 22 Cost of equity capital 23 Required rate of return 24 Accumulated depreciation on long-temm assets $15,300,000 7,650,000 14% 11% $2,200,000 $1,510,000 $ 220,000
. Refresh Resorts, Inc., operates health spas in Key West, Florida; Phoenix, Arizona; and Carmel, California. The Key West spa was the company’s first and opened in 1991. The Phoenix spa opened in 2004, and the Carmel spa opened in 2013. Refresh Resorts has previously evaluated divisions based on RI, but the company is considering changing to an EVA approach. All spas are assumed to face similar risks. Data for 2017 are:
Q.How does the selection of asset measurement method affect goal congruence?
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Key West
Phoenix
Carmel
Total
2 Revenues
3 Variable costs
4 Fixed costs
5 Operating income
6 Interest costs on long-term debt at 8%
7 Income before taxes
8 Net income after 35% taxes
$4,100,000
1,600,000
1,280,000
1,220,000
368,000
852,000
$4,380,000
1,630,000
1,560,000
$3,230,000
955,000
980,000
$11,710,000
4,185,000
3,820,000
3,705,000
1,224,000
2,481,000
1,190,000
416,000
1,295,000
440,000
855,000
774,000
553,800
503,100
555,750
1,612,650
10 Net book value at 2017 year-end:
11 Current assets
12 Long-tem assets
13 Total assets
$ 850,000
5,462,000
6,312,000
$ 2,730,000
17,172,000
19,902,000
$1,280,000
4,875,000
6,155,000
$ 600,000
6,835,000
7,435,000
14
15 Current liabilities
16 Long-term debt
17 Stockholders' equity
18 Total liabilities and stockholders' equity
330,000
4,600,000
1,225,000
6,155,000
265,000
5,200,000
847,000
84,000
5,500,000
1,851,000
7,435,000
679,000
15,300,000
3,923,000
19,902,000
6,312,000
19
20 Market value of debt
21 Market value of equity
22 Cost of equity capital
23 Required rate of return
24 Accumulated depreciation on long-temm assets
$15,300,000
7,650,000
14%
11%
$2,200,000
$1,510,000
$ 220,000](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Ffe617706-288e-41f6-9dbe-091038036f38%2F5743bb7e-21da-49d6-9acf-e1362c513b01%2Fbes74l.jpeg&w=3840&q=75)
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Goal congruence occurs when the divisions and company is at congruence with their goals in respect to the income earned by each division.
Current Method of Residual Income
Amount are in $s in the table
Particulars | Key West | Phoenix | Carmel | Total |
1. Operating income | 1,220,000 | 1,190,000 | 1,295,000 | $3,705,000 |
2. Total Assets | 6,155,000 | 6,312,000 | 7,435,000 | 19,902,000 |
3. Required Rate of Return | 11% | 11% | 11% | 11% |
4. Amount | 6,77,050 | 6,94,320 | 8,17,850 | 2,189,220 |
Return on investment (1-4) | 542,950 | 495,680 | 477,150 | 1,515,780 |
As we can see, all divisions have an almost equal amount of return on investment
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