3) Mallory, Inc. has the following data available for two of its divisions for l

Question

3) Mallory, Inc. has the following data available for two of its divisions for last year: Asian Division $460,000 184,000 92,000 368,000 European Division Sales Contribution Margin Operating income Average operating assets Weighted average cost of capital $ 900,000 470,000 90,000 750,000 14% 14% The tax rate for Mallory, Inc. is 18% Required (1) Compute the following for each division: (a) Sales margin. (b) Capital turnover. (c) ROI (d) Residual income. (e) EVA (assume there are no current liabilities) (2) Briefly discuss which division appears most successful and why?

Explanation / Answer

Asian division appears most successful because the EVA is Positive. EVA shows a company is producing value from the funds invested in it. EVA of Europian Division is Negative. EVA Represents Economic profit of the company which attempts to capture the true profit of the company.

Formula Assian Division Europian division 1 Sales           460,000.00    900,000.00 2 Contribution           184,000.00    470,000.00 3 Operating income             92,000.00      90,000.00 4 Tax             16,560.00      16,200.00 5 NOPAT /Net Income             75,440.00      73,800.00 6 Average Operating assets           368,000.00    750,000.00 7 Cost of Capital 14% 14% 8 Sales Margin Operating Income/ sales 20% 10% 9 Capital turnover Sales/ Average Operating Assets 1.25 1.2 10 ROI Net Income/ Averagr Operating Assets 21% 10% 11 Resedual income Operating income-(Operating Assets * Cost of Capital)             40,480.00    (15,000.00) 12 EVA NOPAT - (Operating Assets*Cost of capital)             23,920.00    (31,200.00)

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