Question

Exercise 14-32 (Algo) Comparing Business Units Using Residual Income (LO 14-3)

Universal Electronics, Inc. (UEI), which started operations one year ago, has two divisions: Consumer and Commercial. Both divisions invest heavily in R&D, which is assumed to benefit five years. R&D spending is made uniformly throughout the year. UEI has a cost of capital of 11 percent. Selected financial information for the two divisions (in thousands of dollars) for the year just completed follows.

	Consumer				Commercial
Sales revenue	$	30,000			$	49,000
Divisional income		5,310				5,535
Divisional investment		29,500				30,750
Current liabilities		1,800				1,600
R&D		1,800				1,800

Required:

Evaluate the performance of the two divisions assuming UEI uses residual income. (Enter your answers in dollars rounded to 1 decimal place.)

RI of consumer division_______________

RI of commercial division______________

Answer 1

Consumer Division

Divisional income = $5,310

Divisional investment = $29,500

Residual income = Divisional income - (Divisional investment x Cost of capital)

= 5,310 - (29,500 x 11%)

= 5,310-3,245

= $2,065

Commercial Division

Divisional income = $5,535

Divisional investment = $30,750

Residual income = Divisional income - (Divisional investment x Cost of capital)

= 5,535 - (30,750 x 11%)

= 5,535-3,382.50

= $2,152.50

RI of consumer division $2,065

RI of commercial division $2,152.50

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