19-3
Heather Smith Cosmetics (HSC) manufactures a variety of productsand is organized into three divisions (investment centers): soapproducts, skin lotions, and hair products. Information about themost recent year’s operations follows. The information includes thevalue of intangible assets, including research and development,patents, and other innovations that are not included on HSC’sbalance sheet. Were these intangibles to be included in thefinancial statements (as they are for EVA®), the increase in thebalance sheet and the increase in after-tax operating income wouldbe as given below:
| Division | Operating
Income | Average
Total Assets | Value of
Intangibles | Intangibles’
Effect on 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.
