Cullumber Corporation recently announced a bonus plan to reward the manager of i
ID: 2595139 • Letter: C
Question
Cullumber Corporation recently announced a bonus plan to reward the manager of its most profitable division. The three divisional managers are to decide which performance measure will be used to evaluate profitability. Cullumber Corporation requires a 10% minimum return on investment.
The following information is available for the year just ended.
Book Value
of Assets Divisional
Operating
Income Ashton $800,000 $94,960 Drye 752,800 91,360 Poole 440,000 57,800 (a) Calculate return on investment. (Round R01 to 2 decimal places, e.g. 5.12%.) Return on Investment Ashton Drye Poole Which division performed the best? (b) Calculate residual income.(If the amount is negative then enter with a negative sign preceding the number, e.g.-5,125 or parentheses, e.g (5,125). Residual Income Ashton $ Drye Poole$ Which division performed the best?
Explanation / Answer
a) Return on Investment = Divisional Operating Income/Gross Book Values of Asset Gross Book Value of Assets (a) Divisional operating Income (b) ROI = (b)/(a) Ashton $800,000.00 $94,960.00 11.87% Drye 752800 91360 12.14% Poole 440000 57800 13.14% Poole performed best b) Residual Income = Divisional operating Income - (10% x Gross book value) Divisional operating Income (b) Gross Book Value of Assets (a) x 10% Residual income = b - a Ashton $94,960.00 -$80,000.00 $14,960.00 Drye $91,360.00 -$75,280.00 $16,080.00 Poole $57,800.00 -$44,000.00 $13,800.00 Drye has the highest Residual Income c) Economic Value Added = Divisional operating income after tax = 6% x gross book value Divisional operating Income after tax @ 21% (b) Gross Book Value of Assets (a) x 6% EVA = b - a Ashton $75,018.40 -$48,000.00 $27,018.40 Drye $72,174.40 -$45,168.00 $27,006.40 Poole $45,662.00 -$26,400.00 $19,262.00 Ashton has the highest EVA
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