Jiambalvo Managerial Accounting
12–14
P9. [LO 2]
a. As indicated, EVA has actually decreased from 2014 to 2015.
2018
2017
Income from operations
$ 990,000
$ 935,000
b. Income does not include a charge for equity capital. The cost of equity capital is
Less taxes at 40%
$ 561,000
Total assets
Less NIBCL
Investment
Cost of capital
0.12
P10. [LO 2, 3]
a.
Brick & Mortar
Internet
Division
Division
Net income
$(1,125,000)
$(2,261,700)
b. In its early years, the Internet Division needs to make substantial investments in
c. Brick and Mortar Division
Jiambalvo Managerial Accounting
12–16
d. Brick and Mortar Division
P11. [LO 2]
a.
In 000s 2015 2016 2017 2018
b. Managers can increase income by investing in projects that earn a positive
c.
In 000s 2015 2016 2017 2018
Net income $3,750 $4,313 $5,088 $6,105
P12. [LO 3]
a. Financial—Growth in sales
P13. [LO 3]
a. Customer—Customer satisfaction
P14. [LO A1]
a. The market price is the best transfer price in this situation. It’s not likely to be
P15. [LO A1]
It appears that there is frivolous use of the plumbing and electrical department. A
charge for service would reduce this problem. But should the charge be the “cost”
Jiambalvo Managerial Accounting
12–18
P16. [LO A1]
a. Because the Fabric division has substantial idle capacity, variable cost is a
good approximation of the opportunity cost of providing fabric to the Clothing
P17. [LO 2]
a. 1. Division without embroidery machine
Operating Income
$ 5,000,000
Total assets
Less NIBCL
Investment
2. Division with embroidery machine
Operating income of division
$ 5,000,000
Add: Net income of machine
1,027,500
Total net income
$ 6,027,500
Total assets of division
$33,000,000
Add: Investment of machine
5,250,000
Less noninterest-bearing
1,500,000
Total investment
$36,750,000
ROI
Chapter 12 Decentralization and Performance Evaluation
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b. 1. Division without embroidery machine
Operating
income
$ 5,000,000
2. Division with embroidery machine
liabilities
P18. [LO 4]
a. Division B has the highest net income, followed by Division C and then Division
b.
Division A
Division B
Division C
Net income
$178,500
$1,820,000
$1,365,000
Plus interest
Total assets
$927,500
Less noninterest- bearing
ROI
Chapter 12 Decentralization and Performance Evaluation
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c.
Division A
Division B
Division C
Net income
$178,500
$1,820,000
$1,365,000
Division B has the highest residual income, followed by Division C and then
Plus interest
Total assets
18,725,000
11,156,250
Less noninterest-bearing
Investment
16,537,500
10,106,250
Jiambalvo Managerial Accounting
12–22
Case 12-1 [LO 2]
HOME VALUE STORES
Summary
A company that operates membership warehouse stores is evaluated using EVA.
• Takes students through the calculation of EVA.
Questions to ask students
1. What is the situation facing Home Value Stores?
2. What is residual income in 2018 and 2017?
3. Why is it that earnings are up in 2018 by 6.4%, but residual income is decreasing
indicating a decline in shareholder value?
4. Both Tanya Barrett, a board member, and the new CEO are concerned about
what the company is doing today to create future firm value. Is there a
performance measurement technique that the company can use to help
warehouse managers understand how their actions are linked to the company’s
strategy and how they can affect future firm value?
Discussion
What is the situation facing Home Value Stores? Tanya Barrett, a board member of
Home Value Stores, has asked for an evaluation of financial performance that takes into
account both the level of investment and the cost of capital. Specifically, she wants to
know the level of profit (loss) earned in excess of the amount given the investment in
the company. In other words, she is asking for a calculation of residual income.
Chapter 12 Decentralization and Performance Evaluation
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Calculation of NOPAT (in
thousands)
2018
2017
Net income
$1,237,600
$1,163,175
Plus interest expense
NOPAT
$1,309,100
$1,221,675
Calculation of investment
Total assets
$3,485,000
$2,375,000
Less noninterest-bearing
Investment
$2,847,000
$1,786,000
Required return given level
of investment (invested capital x
cost of capital)
Why is it that earnings are up in 2018 by 6.4% but residual income is decreasing
indicating a decline (albeit, a small decline) in shareholder value? Answering this
Jiambalvo Managerial Accounting
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b. Both Tanya Barrett, a board member, and the new CEO are concerned about
what the company is doing today to create future firm value. Is there a
performance measurement technique that the company can use to help
warehouse managers understand how their actions are linked to the company’s
strategy and how they can affect future firm value? Hopefully, students will
Case 12-2 [LO 2]
WinTechMotors
Summary
A company is showing increased sales and profit. However, the company is not earning
a return consistent with its cost of capital and EVA is negative.
• Demonstrates the value of EVA.
• Links a management action (reducing the investment in inventory) to an
EVA improvement.
Questions to ask students
1. What is the situation at WinTechMotors?
2. What is EVA in 2017 and 2016?
3. How many cars must be cut from inventory to achieve a zero EVA (i.e., a position
where the company is earning a return equal to its cost of capital)?
Discussion
What is the situation at WinTechMotors? The owners believe that their company is a
success because sales and profit have increased. However, profit does not capture the
cost of equity and the owners have a large investment in their company.
(a)What is EVA in 2017 and 2016? As indicated, EVA is negative in both years.
Jiambalvo Managerial Accounting
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At the end of 2017, the company had 75 cars on hand, but only 28 cars can be in
inventory at the end of 2017 if the company is to have a zero EVA.