8. Innovative Furnishing Solutions (IFS), a division of Steelman Corporation buys and installs modular office components. For the most recent year, the division had the following performance targets:
Asset turnover 2.5
Profit margin 6%
Target rate of return on investments for RI 13%
Cost of capital 10%
Income tax rate 40%
Actual information concerning the company's performance for last year follows:
Total assets at beginning of year $3,600,000
Total assets at end of year 5,300,000
Total invested capital (annual average) 8,000,000
Variable operating costs 3,650,000
Direct fixed costs 4,770,000
Allocated fixed costs 675,000
a. For IFS, compute the segment margin and the average assets for the year.
b. Based on segment margin and average assets, compute the profit margin, asset turnover and ROI.
c. Evaluate the ROI performance of IFS.
d. Using your answers from part b., compute the residual income of IFS.
e. Compute the EVA of IFS. Why are the EVA and RI levels different?
f. Based on the data given in the problem, discuss why ROI, EVA and RI may be inappropriate measures of performance for IFS.