Q1) Innovative Furnishing Solutions (IFS), division of Steelman Corporation buys and installs modular office components. For the most recent year, division had the following performance targets:
| Asset turnover |
2.5 |
| Profit margin |
6% |
| Target rate of return on investments for RI |
13% |
| Cost of capital |
10% |
| Income tax rate |
40% |
Actual information concerning company's performance for last year follows:
| Total assets at beginning of year |
$3,600,000 |
| Total assets at end of year |
5,300,000 |
| Total invested capital (annual average) |
8,000,000 |
| Sales |
9,000,000 |
| Variable operating costs |
3,650,000 |
| Direct fixed costs |
4,770,000 |
| Allocated fixed costs |
675,000 |
Questions:
a. For IFS, calculate segment margin and average assets for the year.
b. Based on segment margin and average assets, calculate profit margin, asset turnover and ROI.
c. Estimate ROI performance of IFS.
d. Using your answer from part b., calculate residual income of IFS.
e. Calculate EVA of IFS. Why are EVA and RI levels different?
f. Based on data given in the problem, describe why ROI, EVA and RI may be inappropriate measures of performance for IFS.