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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 9 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 $ 645 $ 1,350
Cost of goods sold 3,290 6,100
Divisional investment 9,900 75,500
R&D 2,450 3,150
Sales 9,800 15,500
SG&A 835 1,080

Required:

a. Compute divisional income for the two divisions.

division income

ac division

so division

b. Calculate the operating margin, which is equivalent to the return on sales, for the two divisions. (Enter your answers as a percentage rounded to 2 decimal places (i.e., 32.16).)

operating margin

AC division %

SQ divison %

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

Roi

AC divison %

So divison %

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

residual income for ac division So division

Solutions

Expert Solution

a. Compute divisional income for the two divisions.

AC Division

SO Division

Sales

9800

15500

Cost of goods sold

3290

6100

Gross margin

6510

9400

SG&A

835

1080

R&D

2450

3150

Allocated corp. overhead

645

1350

(A) divisional income/ operating income

2580

3820

divisional income

AC Division

2580

SO Division

3820

___________________________________________________________

b.

Calculate the operating margin, which is equivalent to the return on sales, for the two divisions.

AC Division

SO Division

operating income

2580

3820

Divided by

Sales

9800

15500

operating margin

26.3%

24.6%

operating margin

AC Division

26.3%

SO Division

24.6%

___________________________________________________________

c.

Calculate ROI for the two divisions

AC Division

SO Division

operating income

2580

3820

Divided by

Divisional investment

9900

75500

ROI for the two divisions

26.1%

5.1%

ROI for the two divisions

AC Division

26.1%

SO Division

5.1%

_______________________________________________________________

d. Compute residual income for the two divisions

AC Division

SO Division

operating income (A)

2580

3820

Divisional investment (B)

9900

75500

Multiplied by: cost of capital ©

x 9%

x 9%

Required income (D)

891

6795

residual income (A-D)

1689

-2975

residual income

AC Division

1689

SO Division

-2975

ekkarill92 answered 3 months ago
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