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Sapsora Company uses ROI to measure the performance of its operating divisions and to reward division managers

Sapsora Company uses ROI to measure the performance of its operating divisions and to reward division managers
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ACCOUNTING

Sapsora Company uses ROI to measure the performance of its operating divisions and to reward division managers. A summary of the annual reports from two divisions is shown below. The company’s weighted-average cost of capital is 12 percent.

Division A Division B

Total Assets $6,000,000 $8,750,000

Current Liabilities 500,000 1,750,000

After-Tax Operating Income 1,000,000 1,180,000

ROI 25% 14%

a. Which division is more profitable?

b. Would EVA more clearly show the relative contribution of the two divisions to the company as a whole? Show the computations.

c. Suppose the manager of Division A was offered a one-year project that would increase his investment base by $250,000 and show a profit of $37,500. Would the manager choose to invest in the new project?

 

FILE: MS WORD

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