Colonial Pharmaceuticals is a small firm specializing in new products. It is org
ID: 2400134 • 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 9 percent cost of capital and uses beginning-of-the-year investment when computing ROl and residual income. Ignore income taxes. ?? Division S 690 3,380 0,800 2,900 11,600 SO Division 900 Allocated corp overhead Cost of goods sold 5.200 71,000 2,700 11,000 SGSA 970 Required a. Compute divisional income for the two divisions. AC Division so 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 ROl 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
Answer:
(A)
AC
Division
SO
Division
Divisional income
3660
1570
Working notes for the above answer is as under
AC
Division
SO
Division
Sales
11600
11000
less:
cost of goods
3380
5200
gross margin.
8220
5800
Less:
SG &A
970
630
R & D
2900
2700
Allocated Corp. Overhead
690
900
Divisional income
3660
1570
___________________________________________
(B)
AC
Division
SO
Division
Operating income/ Divisional income
3660
1570
Divided By
Sales
11600
11000
Operating margin
31.55%
14.27%
AC
Division
SO
Division
Operating margin
31.55%
14.27%
__________________________________________
(C)
AC
Division
SO
Division
Operating income/ Divisional income
3660
1570
Divided By
Divisional Investment
10800
71000
ROI
33.89%
2.21%
AC
Division
SO
Division
ROI
33.89%
2.21%
_________________________________________
(D)
AC
Division
SO
Division
Divisional Investment
10800
71000
Required return
x 9%
x 9%
Required return
972
6390
Less: Actual Income/ Divisional income
3660
1570
Residual Income
2688
-4820
AC
Division
SO
Division
Residual Income
2688
-4820
AC
Division
SO
Division
Divisional income
3660
1570