Management Control Systems II

Complete Problem 10-41 (p. 424). (A 1-page response is required.)

Discussion Question: 5-2: The Jeske Company

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1. Economic Value added (EVA) for Year 1 and Year 2.

EVA (economic value added) is the estimate of the organization’s economic profit or the amount of profit that is created more than the required return by the shareholders of the organization (Weetman, 2019). Therefore, EVA is the net profit calculated by deducting the cost of capital from the operating profit. Therefore, the Economic Value added= Net Operating Profit After Taxes (NOPAT) – (Weighted Average Cost of Capital (WACC) * Invested Capital) (Horngren, Sundem, Burgstahler and Schatzberg, 2014).

Net Profit After Taxes= revenues – operating expenses – cash income taxes

Year 1

NOPAT = $4,510- $3615- $255 = $640

Weighted Average Cost of Capital (WACC) * Invested Capital = $2,689 x 11.5% = $309.235

Year 1 EVA = $640- $309.235 = $330.765

Year 1 EVA = $331 (rounded up)

Year 2

NOPAT = 4,463 – $3,569 – $292 = $602

Weighted Average Cost of Capital (WACC) * Invested Capital = $2,584 x 11.5% = $328.21

Year 2 EVA = $602- $328.21 = $273.79

Year 2 EVA = 274 (rounded up)

2. Change in EVA between years 1 and 2

From the above calculations, it is evident that there was a decrease in the economic value added from year one at $331 million to year two at $274 million. The chart above indicates that there was a decrease in the amount of revenue from $4,463 in year 1 to $4,510 in year 2. There was a decline in the operating expenses from $3,615 in year one to $3,569 in year two. The income taxes increased from $255 in year one to $292 in year two. These changes in income taxes, operating expenses, and revenue contributed to the changes in the Economic value added (EVA).

References

Horngren, C. T., Sundem, G. L., & Burgstahler, D., & Schatzberg, J. (2014).  Introduction to Management Accounting, (16th ed.). Boston, MA: Pearson

Weetman, P. (2019). Financial and management accounting. Pearson UK.

DISCUSSION QUESTION 5-2

MA610 Managerial Accounting

Lesson 5: Management Control Systems

Upon completion of the Required Readings, write a thorough, well-planned narrative answer to the following discussion question.  Rely on your Required Readings and the Lecture and Research Update for specific information to answer the discussion question, but turn to your original thoughts when asked to apply, evaluate, analyze, or synthesize the information.  Your Discussion Question response should be both grammatically and mechanically correct, and formatted in the same fashion as the question itself.  If there is a Part A, your response should identify a Part A, etc.  In addition, you must appropriately cite all resources used in your responses and document in a bibliography using APA style.

Discussion Question 2

Complete Problem 10-41 (p. 424).     (A 1-page response is required.)

Grading Rubric

Please refer to the rubric on the following page for the grading criteria for this assignment.