Colonial Pharmaceuticals is a small firm specializing in new products. It is organized into two divisions, which
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 as follows. 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.
AC Division SO Division
Allocated corp. overhead $645 $1,350
Cost of goods sold $3,290 $6,100
Divisional investment $9,900 $75,500
R&D $2,450 $3,150
Sales $9,800 $15,500
SG&A $835 $1,080
a.Compute divisional income for the two divisions.
b.Calculate the operating margin, which is equivalent to the return on sales, for the two divisions.
c.Calculate ROI for the two divisions.
d.Compute residual income for the two divisions.
Expert Answer:
a To compute divisional income we subtract the total expenses from the total sales revenue for each ... View the full answer
