## 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 9 percent cost of capital and uses beginning-of-the-year Investment when computing ROI and residual Income. Ignore Income taxes. points 8 01:28:24 Allocated corp. overhead Cost of goods sold Divisional investment R&D Sales SG&A AC Division $ 630 3,260 9,600 2,300 9, 200 799 SO Division $ 1,500 6,400 77,000 3,300 17,00 1,230 Required: a. Compute divisional Income for the two divisions. AC Division SO Division Divisional income 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 (.e., 32.16).) AC Division SO Division Operating margin Ac Division Division Operating margin c. Calculate ROI for the two divisions. (Enter your answers as a percentage rounded to 2 decimal places (.e., 32.16).) AC Division SO Division ROI d. Compute residual Income for the two divisions. (Negative amounts should be indicated by a minus sign.) AC Division SO Division Residual income

## Answers

a.

divisional income:

AC division SO division divisional income 2,310 4,570 working:

income = sales -allocated oh - cost of goods sold - r & d- sg & a.

for AC division = 9200-630-3260-2300-700

=>$2,310.

SO division

=>17,000-1500-6400-3300-1230

=>$4,570.

b.

AC division SO division operating margin 25.11% 26.88% note:

operating margin = net income / sales *100

=>AC =2310/9200*100

=>25.11%.

SO = 4570/17,000*100

=>26.88%.

c.

AC division SO division ROI 24.06% 5.94% ROI = net income / investment *100

AC=>2310/9600*100

=>24.06%

SO division = 4570/77,000*100

=>5.94%

d.residual income.

AC division SO division Residual income $1,446 -,2360 residual income = net income - (capital invested *cost of capital)

=>AC = 2310 - (9600*9%)

=>$1,446.

SO = 4570-(77,000*9%)

=>-2,360

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