Reference no: EM132857506
Question - Princess Bhd. (PB) manufactures and sells toys. It has two divisions that are Snow White Division (SW) and Sleeping Beauty Division (SB). The company has decided that the required rate of return for any investment in each division is 10 percent. The tax rate for PB is 35 percent. PB has two sources of funds: equity capital with a market value of RM25,000,000 and a cost of equity of 15 percent and long term debt with a market value of RM15,000,000 at an interest rate of 12 percent. Given is PB's operating data for year 2020.
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Snow White (SW)
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Sleeping Beauty (SB)
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Revenue (RM)
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1,255,000
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920,000
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Direct Material (RM)
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465,600
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405,000
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Direct Labour (RM)
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232,800
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202,500
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Overhead (RM)
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77,600
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67,500
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Other operating expenses (RM)
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64,000
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52,000
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Average assets (RM)
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8,300,000
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1,930,000
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Required -
(a) Determine return on investment (ROI) and economic value added (EVA) for each division for year 2020.
(b) SB is considering to improve its performance. It has two options as below:
Option 1: SB can improve the quality of its products by improving the quality of material used. This would increase its direct material cost by 10 percent and reduce direct labour cost by 5 percent but increase other operating cost by RM5,000. This improvement is expected to increase the division's revenue by 50 percent.
Option 2: SB can use online marketing strategy which will increase its other operating expense by RM50,000. This strategy is expected to increase its revenue by 45 percent.
Determine the effect of these strategies to SB divisional EVA. Discuss whether the division should proceed with Option 1 or Option 2. Show calculations.