Reference no: EM132649734

You have decided not to go into a business partnership with your friend Sukhdeep as you are certain that he can not be trusted as he continues to behave in an unethical manner. Sukhdeep was a deceitful student often attempting to mislead his teachers at Yorkville. He has continued with this unethical behavior in his working life, and you are convinced he will not be successful.

On the other hand, your reputation as a strong Managerial Accountant as well as an honest and ethical individual has been recognized by other organization's and you have now been offered a position as senior director of a fashion company now earning $194,000 per year plus a 35% annual bonus.

Your new company Fashionista Inc. has two divisions Clothing and Make-up. Below are the financial figures for each division, and the company uses a weighted average cost of capital of 15%.

                                                   Clothing                   Make-up

Assets                              $2,300,000           5,700,000
Operating Income after tax       600,000               1,425,000

Your new boss has asked you to do the following

Required

Question 1. Calculate the ROI and residual income for each division of Fashionista Inc, and briefly explain which division is performing better. What are the advantages and disadvantages of each measure?

Question 2. The CEO of Fashionista has recently heard of another measure similar to residual income called EVA. The CEO has asked you to calculate EVA adjusted incomes of clothing and make-up and finds that the adjusted after-tax operating incomes are $548,000 and $1,047,200, respectively. Also, the clothing division has $320,000 of current liabilities, while the make-up division has only $230,000 of current liabilities. Using the preceding information, calculate EVA and discuss which division is performing better.

Question 3. What nonfinancial measures could Fashionista use to evaluate divisional performance