Question

Colonial Pharmaceuticals is a small firm specializing in new products. It is organized into two divisions,...



Colonial Pharmaceuticals is a small firm specializing in new products. It is organized into two divisions, which are based on the products they produce. AC Division is smaller and the life of the products it produces tend to be shorter than those produced by the larger SO Division. Selected financial data for the past year is shown below. Divisional investment is as of the beginning of the year. Colonial Pharmaceuticals uses a 10 percent cost of capital and uses beginning-of-the-year investment when computing ROI and residual income. Ignore income taxes.

AC Division SO Division
Allocated corp. overhead $ 620 $ 1,600
Cost of goods sold 3,240 6,600
Divisional investment 9,400 78,000
R&D 2,200 3,400
Sales 8,800 18,000
SG&A 760 1,330


Calculate ROI for the two divisions. (Enter your answers as a percentage rounded to 2 decimal places (i.e., 32.16).)

Compute residual income for the two divisions. (Negative amounts should be indicated by a minus sign.)

Homework Answers

Answer #1
1
AC Division SO Division
Divisional income 1980 5070
Divided by Divisional investment 9400 78000
ROI 21.06% 6.50%
2
AC Division SO Division
Divisional investment 9400 78000
X Cost of capital 10% 10%
Minimum required return 940 7800
Divisional income 1980 5070
Less: Minimum required return 940 7800
Residual income 1040 (2730)
Workings:
AC Division SO Division
Sales 8800 18000
Less:
Cost of goods sold 3240 6600
R&D 2200 3400
SG&A 760 1330
Allocated corp. overhead 620 1600
Divisional income 1980 5070
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