Question

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 as follows. 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. Allocated corp. overhead Cost of goods sold Divisional investment R&D Sales SG&A AC Division $ 650 3,300 10,000 2,500 10,000 850 SO Division $ 1,300 6,000 75,000 3,100 15,000 1,030 Required: a. Compute divisional income for the two divisions. b. Calculate the operating margin, which is equivalent to the return on sales, for the two divisions. c. Calculate ROI for the two divisions. d. Compute residual income for the two divisions. Complete this question by entering your answers in the tabs below. Required A Required B Required C Required D Compute divisional income for the two divisions. AC Division So Division Divisional income < Required A Required B >

Answer 1

1.divisional income:

	AC division	SO division
sales	10,000	15,000
less: cost of goods sold	(3,300)	(6,000)
less:allocated overehead	(650)	(1,300)
less: R & D	(2,500)	(3,100)
SG and A	(850)	(1,030)
divisional income	2,700	3,570

2.operating margin = divisional income / sales *100

	AC	SO
divisional income (2700/10000) (3570/15000)	27.0%	23.8%

3.ROI = divisional income / divisional investment.

	AC	SO
ROI (2700/10,000) (3570/75000)	27.0%	4.76%

4.residual income = divisional income - (cost of capital *investment)

AC = 2700 - (10%*10,000)

=>$1,700.

SO = 3570- (10%*75,000)

=> ($3,930).

	AC	SO
Residual income	1,700	- 3,930