Question:
Household Products is a division of Delaware Electronics. The division had the following performance targets for 2010:
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Asset turnover
|
3.1
|
|
Profit margin
|
6%
|
|
Target rate of return on investments for RI
|
15%
|
|
Cost of capital
|
9%
|
|
Income tax rate
|
35%
|
At the end of 2010, the following actual information concerning the company's performance is available:
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Total assets at beginning of year
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$24,800,000
|
|
Total assets at end of year
|
29,600,000
|
|
Average fair market value of invested capital for year
|
36,000,000
|
|
Sales
|
68,000,000
|
|
Variable operating costs
|
34,800,000
|
|
Direct fixed costs
|
27,440,000
|
|
Allocated fixed costs
|
2,700,000
|
Required:
a. Compute the 2010 segment margin and average assets for Household Products.
b. Based on segment margin and average assets, compute the profit margin, asset turnover, and ROI.
c. Evaluate the ROI performance of Household Products.
d. Using your answers from (b), compute the residual income for Household Products.
e. Compute the EVA for Household Products using after-tax segment margin. What causes EVA and RI to differ?
f. Based on the data given in the problem, discuss why ROI, EVA, and RI could be inappropriate measures of performance for Household Products.