7/22/2019 Assignment Print View

3. Award: 10 out of 10.00 points

Exercise 19-27 Return on Investment; Residual Income; EVA® [LO 19-1, 19-2, 19-3]

Heather Smith Cosmetics (HSC) manufactures a variety of products and is organized into three divisions (investment centers): soap
products, skin lotions, and hair products. Information about the most recent year’s operations follows. The information includes the value
of intangible assets, including research and development, patents, and other innovations that are not included on HSC’s balance sheet.
Were these intangibles to be included in the financial statements (as they are for EVA®), the increase in the balance sheet and the
increase in after-tax operating income would be as given below:

Intangibles’
Operating Average Value of Effect on
Division Income Total Assets Intangibles Income
Soap products $3,240,500 $59,990,500 $1,490,500 $ 990,500
Skin lotions 2,740,500 32,990,500 7,990,500 5,990,500
Hair products 4,990,500 54,990,500 990,500 690,500
Minimum desired rate of return 5.00%
Cost of capital 4.00%

Required:
1. Calculate the return on investment (ROI) for each division. (Round your answers to 2 decimal places. (i.e. .1234 = 12.34%))
2. Calculate the residual income (RI) for each division.
3. Calculate EVA® for each division.

Soap Products Skin Lotions Hair Products

1. Return on investment (ROI) 5.40  % 8.31  % 9.08  %
2. Residual income (RI) $ 240,975  $ 1,090,975  $ 2,240,975 

3. EVA ® $ 1,771,760  $ 7,091,760  $ 3,441,760 

References

Worksheet Difficulty: 2 Medium Learning Objective: 19-02 Explain the use and limitations
of residual income for evaluating the short-term financial
performance of investment centers.

Exercise 19-27 Learning Objective: 19-01 Learning Objective: 19-03 Explain the use and limitations
Return on Explain the use and of economic value added for evaluating the short-term
Investment; Residual limitations of return on financial performance of investment centers.
Income; EVA® [LO investment for evaluating the
19-1, 19-2, 19-3] short-term financial
performance of investment
centers.

Exercise 19-27 Return on Investment; Residual Income; EVA® [LO 19-1, 19-2, 19-3]

Heather Smith Cosmetics (HSC) manufactures a variety of products and is organized into three divisions (investment centers): soap
products, skin lotions, and hair products. Information about the most recent year’s operations follows. The information includes the value
of intangible assets, including research and development, patents, and other innovations that are not included on HSC’s balance sheet.
Were these intangibles to be included in the financial statements (as they are for EVA®), the increase in the balance sheet and the
increase in after-tax operating income would be as given below:

Intangibles’
Operating Average Value of Effect on
Division Income Total Assets Intangibles Income
Soap products $3,240,500 $59,990,500 $1,490,500 $ 990,500

https://ezto.mheducation.com/hm.tpx?todo=c15SinglePrintView&singleQuestionNo=3.&postSubmissionView=13252709278819715&wid=1325271165… 2/3
7/22/2019 Assignment Print View
Skin lotions 2,740,500 32,990,500 7,990,500 5,990,500
Hair products 4,990,500 54,990,500 990,500 690,500
Minimum desired rate of return 5.00%
Cost of capital 4.00%

Required:
1. Calculate the return on investment (ROI) for each division. (Round your answers to 2 decimal places. (i.e. .1234 = 12.34%))
2. Calculate the residual income (RI) for each division.
3. Calculate EVA® for each division.

Soap Products Skin Lotions Hair Products

1. Return on investment (ROI) 5.40 % 8.31 % 9.08 %
2. Residual income (RI) $ 240,975 $ 1,090,975 $ 2,240,975
3. EVA ® $ 1,771,760 $ 7,091,760 $ 3,441,760

 
Explanation:

1.
Return on investment (ROI)
Soap products: $3,240,500/$59,990,500 = 5.40%
Skin lotions: $2,740,500/$32,990,500 = 8.31%
Hair products: $4,990,500/$54,990,500 = 9.08%

2.
Residual income (RI)
Soap products: $3,240,500 – (0.05 × $59,990,500) = $240,975
Skin lotions: $2,740,500 – (0.05 × $32,990,500) = $1,090,975
Hair products: $4,990,500 – (0.05 × $54,990,500) = $2,240,975

3.
EVA®
Soap products: $3,240,500 + $990,500 – (0.04 × $61,481,000) = $1,771,760
Skin lotions: $2,740,500 + $5,990,500 – (0.04 × $40,981,000) = $7,091,760
Hair products: $4,990,500 + $690,500 – (0.04 × $55,981,000) = $3,441,760

https://ezto.mheducation.com/hm.tpx?todo=c15SinglePrintView&singleQuestionNo=3.&postSubmissionView=13252709278819715&wid=1325271165… 3/3