Colonial Pharmaceuticals is a small firm specializing in new products. It is org

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 AC DivisionSO Division Allocated corp. overhead Cost of goods sold Divisional investment R&D; Sales SG&A; $ 630 3,260 9,600 2,300 9,200 790 $ 1,500 6,400 77,000 3,300 17,000 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 (i.e., 32.16).) AC Division SO Division Operating margin c. Calculate ROI for the two divisions. (Enter your answers as a percentage rounded to 2 decimal places (i.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

Explanation / Answer

Part a)

The divisional income for 2 divisions is determined as below:

____

Part b)

The operating margin for each division is calculated as below:

Operating Margin = Divisional Income/Sales*100

____

Using the values provided in the question and divisional income computed in Part a), we get,

Operating Margin (AC Division) = 2,220/9,200*100 = 24.13%

Operating Margin (SO Division) = 4,570/17,000*100 = 26.88%

____

Part c)

The ROI for each division is arrived as below:

ROI = Divisional Income/Divisional Investment*100

____

Using the values provided in the question and divisional income computed in Part a), we get,

ROI (AC Division) = 2,220/9,600*100 = 23.13%

ROI (SO Division) = 4,570/77,000*100 = 5.94%

____

Part d)

The residual income for 2 divisions is calculated as follows:

Residual Income = Divisional Income - Cost of Capital*Divisional Investment

____

Using the values provided in the question and divisional income computed in Part a), we get,

Residual Income (AC Division) = 2,220 - 9%*9,600 = $1,356

Residual Income (SO Division) = 4,570 - 9%*77,000 = -$2,360

AC Division SO Division Sales 9,200 17,000 Less Cost of Goods Sold 3,260 6,400 Gross Profit 5,940 10,600 Less SG&A 790 1,230 R&D 2,300 3,300 Allocated Corporate Overhead 630 1,500 Divisional Income $2,220 $4,570

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