OPERATING INCOME FOR SEGMENTS
Whirlmore, Inc., manufactures and sells washers and dryers through three divisions: Home Supreme, Apartment, and International. Each division is evaluated as a profit center. Data for each division for last year are as follows (numbers in thousands).
|
|
Home Supreme |
Apartment |
International |
|
Sales |
$2,700 |
$2,400 |
$1,300 |
|
Cost of goods sold |
1,770 |
1,870 |
1,040 |
|
Selling and administrative expenses |
640 |
180 |
100 |
The income tax rate for Whirlmore, Inc., is 30 percent. Whirlmore, Inc., has two sources of financing: bonds paying 8 percent interest, which account for 20 percent of total investment, and equity accounting for the remaining 80 percent of total investment. Whirlmore, Inc., has been in business for over 15 years and is considered a relatively stable stock, despite its link to the cyclical construction industry. As a result, Whirlmore stock has an opportunity cost of 5 percent over the 6 percent long term government bond rate. Whirlmore’s total capital employed is $3 million ($2,100,000 for the Home Supreme Division, $500,000 for the Apartment Division, and the remainder for the International Division).
Required:
1. Prepare a segmented income statement for Whirlmore, Inc., for last year.
2. Calculate Whirlmore’s weighted average cost of capital.
3. Calculate EVA for each division and for Whirlmore, Inc.
4. Comment on the performance of each of the divisions.