Question

Wellness Pharmaceuticals is a small firm specializing in new products. It is organized into two divisions, based on the products they produce. BD Division is smaller and the life of the products it produces tend to be shorter than those produced by the larger PM Division. Selected financial data for the past year is shown below. Divisional investment is as of the beginning of the year. Wellness Pharmaceuticals uses a 9 percent cost of capital and beginning-of-the-year investment when computing ROI and residual income. Ignore income taxes.e building. The following information (in $000s) appears in the accounting records for last year:
	BD Division	PM Division
Allocated Corporate Overhead	$660	$1,980
Cost of Goods Sold	3,520	7,700
Divisional Investment	9,900	88,000
Research and Development	2,200	3,960
Sales	8,800	2,200
SG&A	770	1,683
REQUIRED
1. Compute divisional income for the two divisions.
2. Calculate the operating margin, which is equivalent to the return on sales, for the two divisions.

Answer 1

dlwellness pharmaceuticals comPute divisional ncome: pm DivisiOn BD Division 22000 sales 8800 (3520) Hess cost OF CHO0dsOld $14300 5280 GrooSS mazgin Less (1980) (1683) (3960) (660) Allocated coP OH (2200) J650 Researche Developmond OPeiating n (ome (OPeratin margin HOpeatiy magin sales Opesating ancome F 1650 8800 BD 1.SE 81 30.35% 22000 PM