Cora Manufacturing makes fashion products and competes on the basis of quality and leading-edge designs. The company has $2,500,000 invested in assets in its clothing manufacturings division.After-tax operating income from sales of clothing this year is $550,000. The cosmetic devision has $11,000,000 invested in assets and an after-tax operating income this year of $1,650,000. Income for the clothing division has grown steadily over the last few years. The weighted-average cost of capotal for Cora is 8% and the previous period's after-tax return on investment for each division was 13%. The CEO of Cora has told the manager of each divsion that the division that "performs best" this year will get a bonus.
1- Calculate the ROI and residual income (using the weighted-average cost of capital) for each division of Cora Manufacturing, and briefly explain which manager will get the bonus. What are the advantages and disadvantages of each measure?
2- The CEO of Cora Manufacturing has recently heard of another measure similar to residual income called EVA> the CEO has the accountant calculate EVA adjusted incomes of clothing and cosmetics, and finds that the adjusted after-tax operating incomes are $401,400 and $2,067,200, respectively. Also, the clothing division has $270,000 of current liabilities, while the cosmetics division has only $120,000 of current liabilities. Useing the preceding information, calculate EVA and discuss which division manager will get the bonus.
3- What nonfinancial measures could Cora use to evaluate divisional performances?