Tom and Jerry are both managers of sales teams at Journey Corp., a furniture company whose most popular item is a tweed couch. Tom and Jerry are very competitive and each attempt to outperform one another every year. Currently, Tom's department has better metrics, which has resulted in larger bonuses for Tom and his team. Journey Corp. evaluates both departments based upon their Return on Investment and Economic Value Added. The departments reported the following financial data during the most recent year: It should be noted that Journey uses average operating assets as its definition of investment, and it has a minimum required rate of return of 8.72% and a tax rate of 22%. Journey has used a variety of ways to acquire capital and has the current makeup: Proportion of Equity is 38%, the Equity Rate is 6.5%, the Proportion of Debt is 62%, and the Debt rate is 9.3%. Use this information to answer the following questions. (Do not round intermediate calculations.)
a. Based upon all of the information provided about Journey Corp, Tom, and Jerry, what type of responsibility center is run by each manager? Why do you believe this to be true, and what evidence exists to support your conclusion?
b. What are the Return on Sales, Investment Turnover, and Return on Investment for each department? Note which department has performed better for each calculation.
c. Determine the Weighted Average Cost of Capital, Residual Income, and Economic Value Added (EVA) for each department? Overall, which department had the best performance?

Question

Tom and Jerry are both managers of sales teams at Journey Corp., a furniture company whose most popular item is a tweed couch. Tom and Jerry are very competitive and each attempt to outperform one another every year. Currently, Tom's department has better metrics, which has resulted in larger bonuses for Tom and his team. Journey Corp. evaluates both departments based upon their Return on Investment and Economic Value Added. The departments reported the following financial data during the most recent year:  It should be noted that Journey uses average operating assets as its definition of investment, and it has a minimum required rate of return of 8.72% and a tax rate of 22%. Journey has used a variety of ways to acquire capital and has the current makeup: Proportion of Equity is 38%, the Equity Rate is 6.5%, the Proportion of Debt is 62%, and the Debt rate is 9.3%. Use this information to answer the following questions. (Do not round intermediate calculations.) 
a. Based upon all of the information provided about Journey Corp, Tom, and Jerry, what type of responsibility center is run by each manager? Why do you believe this to be true, and what evidence exists to support your conclusion?
b. What are the Return on Sales, Investment Turnover, and Return on Investment for each department? Note which department has performed better for each calculation.
c. Determine the Weighted Average Cost of Capital, Residual Income, and Economic Value Added (EVA) for each department? Overall, which department had the best performance?

Quizplus · Accepted Answer

The Answer of Tom and Jerry are both managers of sales teams at Journey Corp., a furniture company whose most popular item is a tweed couch. Tom and Jerry are very competitive and each attempt to outperform one another every year. Currently, Tom's department has better metrics, which has resulted in larger bonuses for Tom and his team. Journey Corp. evaluates both departments based upon their Return on Investment and Economic Value Added. The departments reported the following financial data during the most recent year:  It should be noted that Journey uses average operating assets as its definition of investment, and it has a minimum required rate of return of 8.72% and a tax rate of 22%. Journey has used a variety of ways to acquire capital and has the current makeup: Proportion of Equity is 38%, the Equity Rate is 6.5%, the Proportion of Debt is 62%, and the Debt rate is 9.3%. Use this information to answer the following questions. (Do not round intermediate calculations.) 
a. Based upon all of the information provided about Journey Corp, Tom, and Jerry, what type of responsibility center is run by each manager? Why do you believe this to be true, and what evidence exists to support your conclusion?
b. What are the Return on Sales, Investment Turnover, and Return on Investment for each department? Note which department has performed better for each calculation.
c. Determine the Weighted Average Cost of Capital, Residual Income, and Economic Value Added (EVA) for each department? Overall, which department had the best performance?

Tom and Jerry Are Both Managers of Sales Teams at Journey