Colonial Pharmaceuticals is a small firm specializing in new products. It is org
ID: 2392142 • Letter: C
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 below. Divisional investment is as of the beginning of the year. Colonial Pharmaceuticals uses a 8 percent cost of capital and uses beginning-of-the-year investment when computing ROl and residual income. Ignore income taxes. AC Division SO Division Allocated corp, ovemead Cost of goods sold Divisional inwestment R&D; $ 625 3,250 9,500 2,250 9,000 775 S 1,550 .500 7,500 3,350 17,500 1,280 SGSA Required a. Compute divisional income for the two divisions. 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 (i.e., 32.16).) Operating margin c. Calculate ROI for the two divisions. (Enter your answers as a percentage rounded to 2 decimal places (i.e., 32.16).) ROI d. Compute residual income for the two divisions. (Negative amounts should be indicated by a minus sign.) Residual incomeExplanation / Answer
a)
Computation of divisional income for the two divisions.
particulars
AC Division
SO Division
Sales
9000
17500
less:- Cost of goods sold
3250
6500
less:- Allocated computed overhead
625
1550
less:- R&D
2250
3350
less:- SG&A
775
1280
Divisional income
2100
4820
AC Division
SO Division
Divisional income
2100
4820
b)
Computation of operating margin which is equivalent to return on sales for the two divisions.
Operating margin = Divisional income/Divisional Sales
AC Division
%
SO Division
%
Operating margin
2100/9000
23.33
4820/17500
27.54
c)
Computation of ROI for the two divisions:
ROI = Divisional income/Divisional investment
AC Division
%
SO Division
%
ROI
2100/9500
22.10
4820/77500
6.22
d)
Computation of Residual income:
Residual income = Excess of operational income over and above cost of capital
AC Division
SO Division
Cost of Capital (Investment amount*Cost of capital) (A)
9500*8% = 760
77500*8% = 6200
Divisional income (B)
2100
4820
Residual income (B -A)
1340
-1380
particulars
AC Division
SO Division
Sales
9000
17500
less:- Cost of goods sold
3250
6500
less:- Allocated computed overhead
625
1550
less:- R&D
2250
3350
less:- SG&A
775
1280
Divisional income
2100
4820