Question 1 Carla Vista Corporation recently announced a bonus plan to reward the
ID: 2595182 • Letter: Q
Question
Question 1 Carla Vista 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. Carla Vista Corporation requires a 10% minimum return on investment. The following information is available for the year just ended. Gross Divisional Book Value Operating Division of Assets Income Ashton Drye Poole $800,000 $94,730 749,600 91,900 454,000 58,330 (a) Calculate return on investment. (Round R01 to 2 decimal places, eg. 5.12%.) Return on Investment Ashton Drye Poole Which division performed the best?Explanation / Answer
Answer:
1
Return on investment
Astrone
11.84%
Drye
12.26%
Poole
12.85%
Poole division performed the best
Working notes for the answer:
Gross
book value of assets
Divisional Operating
income
Return on investment
A
B
B/A
Astrone
800,000
94730
11.84%
Drye
749600
91900
12.26%
Poole
454000
58330
12.85%
___________________________________________
2
Residual
income
Astrone
14,730
Drye
16,940
Poole
12,930
Drye division performed the best
Working notes for the answer:
Gross
book value of assets
Minimum
return %
Minimum
return in
amount $
Divisional Operating
income
Residual
income
A
B
C=A*B
D
E=D-C
Astrone
800,000
10%
80,000
94730
14,730
Drye
749600
10%
74,960
91900
16,940
Poole
454000
10%
45,400
58330
12,930
_________________________________________________
C
Economic value added
EVA
Astrone
15047.5
Drye
16453
Poole
11967.5
Astrone division performed the best
Working notes for the answer:
Devisional Operating
income
tax amount
After tax
operating income
Gross
book value of assets
WACC
Economic
value added
A
B
C=A-B
D
E
F=D*E
G=C-F
Astrone
94730
23682.5
71047.5
800,000
7%
56000
15047.5
Drye
91900
22975
68925
749,600
7%
52472
16453
Poole
58330
14582.5
43747.5
454,000
7%
31780
11967.5
Return on investment
Astrone
11.84%
Drye
12.26%
Poole
12.85%
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