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Question - Consider the following data for Beauty, Inc., a company that makes fashion products and has two divisions, Clothing Division and Cosmetics Division:
Items
Divisional profit margin
Divisional investment (assets)
Required rate of return
Clothing Division
$1,000,000
$5,000,000
6%
Cosmetics Division
$2,000,000
$12,500,000
The CEO of Beauty has told the manager of each division that the division that "performs best" this year will get a bonus.
Required -
a) Calculate the ROI (return on investment) and residual income for each division of Beauty.
b) Based on your answer above, explain which manager will get the bonus.
c) Explain the advantages and disadvantages of each measure.
Beauty has heard of another measure called EVA (economic value added), which is similar to residual income, but still not sure about how EVA works. How would you help the company to distinguish EVA from residual income?
Recommend nonfinancial measures that Beauty could use to evaluate its divisional performances.
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