Question

Calculating Economic Value Added East Mullett Manufacturing earned operating income last year as shown in the following income statement: Sales $630,000 Cost of goods sold 380,000 Gross margin $250,000 Selling and administrative expense 174,400 Operating income $ 75,600 Less: Income taxes (@ 40%) 30,240 Net income $ 45,360 Total capital employed equaled $380,000. East Mullett's actual cost of capital is 8 percent. Required: Calculate the EVA for East Mullett Manufacturing. $

Answer 1

Answer:

$14,960

Explanation:

Data provided in the question:

Sales = $630,000

Cost of goods sold = 380,000

Gross margin = $250,000

Selling and administrative expense = 174,400

Operating income = $75,600

Income taxes (@ 40%) = 30,240

Net income i.e After tax income = $45,360

Total capital employed = $380,000

East Mullett's actual cost of capital = 8 percent

Now,

EVA for East Mullett Manufacturing

= After tax income - [ Actual cost of capital × Total capital employed ]

= $45,360 - [ 8% × $380,000 ]

= $45,360 - $30,400

= $14,960