Becky's Bikes Inc To Calculate EVA,management Requires Adjustments for Marketing and Non-Interest Bearing

question 52

Essay

Becky's Bikes Inc.has two divisions: Retail and Service.The following information is for each division at Becky's Bikes for the most recent fiscal year.
$\begin{array}{lrr}&\text { Retail Division }&\text {Service Division }\\\text { Income Statement }\\\text { Sales } & \$ 1,200,000 & \$ 1,000,000 \\\text { Cost of sales } & 550,000 & 400,000 \\ \text { Gross margin } & 650,000 & 600,000 \\\text { Allocated overhead (from corporate) } & 210,000 & 180,000 \\\text { Marketing expense } & 130,000 & 120,000 \\\text { Administrative expense } & 60,000 & 55,000 \\\text { Operating income } & 250,000 & 245,000 \\\text { Income tax expense (40\% rate) } & 100,000 & 98,000 \\\text { Net income } & 150,000 & 147,000 \\\\\text { Balance Sheet Information }\\\text { Average operating assets } & \$ 600,000 & \$ 375,000 \\\text { Non-interest bearing current liabilities } & 100,000 & 75,000\\\\\text { Percent cost of capital }&12\%&12\%\end{array}$

To calculate EVA,management requires adjustments for marketing and non-interest bearing current liabilities as outlined below.
Marketing will be capitalized and amortized over several years resulting in an increase to average operating assets of $50,000 for the Retail division and $32,500 for the Services division.On the income statement,marketing expense for the year will be added back to operating income,then marketing amortization expense for one year will be deducted.The current year amortization expense will total $30,000 for the Retail division and $20,000 for the Services division.
Non-interest bearing liabilities will be deducted from average operating assets.
Calculate economic value added (EVA)for each division and comment on your results.

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Definitions:

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