$14-49.$ Comparing Business Units Using Divisional Income, ROI, and Residual Income

Navarre Energy Research specializes in developing and commercializing new products. It is organized into two divisions, which are based on the products they produce. Canal Division is smaller, and the lives of the prodacts it produces tend to be shorter than those produced by the larger Lake Division. Selected financial data for the past year are shown in the following table. Divisioeal investment is as of the beginning of the year. Navarre uses an $8$ percent cost of capital and begio$-$ning$-$of$-$year imvestment when computing ROI and residual income. Ignore income taxes.

$\backslash$table$[[,$A$,B,$C$],[1,,$Division$],[2,,$Canal,Lake$],[3,,($$$000),($$$000)],[4,$Allocated corp. overhead,$ $4,100,$$ $9,600],[5,$Cost of goods sold,$20,000,30,000],[6,$Divisional investment,$60,100,400,000],[7,$R$8$D$,12,000,32,000],[5,$Sales,$50,000,100,000],[9,$SGSA $($excl$.$ RAD$),4,500,8,000]]$

Required

a$.$ Compute divisional income for the two divisions.

b$.$ Calculate the operating margin, which is equivalent to the return on sales, for the two divisioes.

c$.$ Calculate ROI for the two divisions.

d$.$ Compute residual income for the two divisions.

e$.$ Assess the financial performance of the two divisions based on your analysis.

$160.$ Economic Value Added

Normandy lestruments invests heavily in research and development $($R$14-49.$ Comparing Business Units Using Divisional Income, ROI, and Residual Income

Navarre Energy Research specializes in developing and commercializing new products. It is organized into two divisions, which are based on the products they produce. Canal Division is smaller, and the lives of the prodacts it produces tend to be shorter than those produced by the larger Lake Division. Selected financial data for the past year are shown in the following table. Divisioeal investment is as of the beginning of the year. Navarre uses an $8$ percent cost of capital and begio$-$ning$-$of$-$year imvestment when computing ROI and residual income. Ignore income taxes.

$\backslash$table$[[,$A$,B,$C$],[1,,$Division$],[2,,$Canal,Lake$],[3,,($$$000),($$$000)],[4,$Allocated corp. overhead,$ $4,100,$$ $9,600],[5,$Cost of goods sold,$20,000,30,000],[6,$Divisional investment,$60,100,400,000],[7,$R$8$D$,12,000,32,000],[5,$Sales,$50,000,100,000],[9,$SGSA $($excl$.$ RAD$),4,500,8,000]]$

Required

a$.$ Compute divisional income for the two divisions.

b$.$ Calculate the operating margin, which is equivalent to the return on sales, for the two divisioes.

c$.$ Calculate ROI for the two divisions.

d$.$ Compute residual income for the two divisions.

e$.$ Assess the financial performance of the two divisions based on your analysis.

$160.$ Economic Value Added

Normandy lestruments invests heavily in research and development $($R